Offices are out of favour for many investors, evidenced by the near illiquidity of lot sizes more than £100mn in the City of London area.
The silver lining to the recent downward valuation of the once record-breaking Walkie Talkie building in London by a reported £380mn is that the market is adjusting to a new norm.
With falling values and wider environmental, social and economic trends continuing to affect the office sector, many owners are considering their strategies for the future of their assets.
Options vary according to which part of the market you are looking at and these opportunities will be fact-specific as there is no one-size-fits-all solution, especially at the lower end of the market.
Pockets of the market remain active with smaller assets attracting cash buyers and the core West End consistently outperforming the City.
However, central London transaction volumes remain low, meaning fewer comparables to value larger assets.
It feels like we are slowly turning a corner and should expect more activity later in 2025 as the bid-ask spread narrows.
Employees need to get to the office easily and once there, they want to do more than just work.
With steadying inflation, the election behind us and the hope of lower interest rates on the horizon, the UK is once again looking like an attractive market.
There are good fundamentals as prime yields stabilise and strong rental growth is anticipated in the months and years to come for areas where supply of good offices remains constricted.
Investors needing a target return within a fixed period may be under pressure to do something now, but others that have the luxury of time (and can bear the cost of refinancing) can choose to wait and trade larger assets later.
Being the best
Strategies for owners will be governed by the quality of the assets, which are increasingly seen through the lens of ‘the best and the rest’.
Sustainability credentials are a key aspect of what constitutes quality and both the green premium and the brown discount are affecting the anticipated returns.
This is driven in part by discerning corporate occupiers that need offices which align with their own ESG strategies.
Government policy is also playing a role, as the current minimum energy efficiency standards for buildings and the proposed tightening of the thresholds for permitted office lettings has presented landlords with little choice but to upgrade or risk environmental obsolescence.
The flight to quality has been further fuelled by employees needing reasons to return to the office.
To attract and retain the best talent, companies require welcoming receptions and amenities such as terraces, cafes and gyms, as well as end-of-trip facilities – think showers, cycle storage and lockers.
New schemes at 30 Golden Square and 8 Bishopsgate have scented entrances to create that five-star experience.
Owners will need to identify which older assets can be given a new lease of life to compete with these prime developments that come with modern features as standard.
The best offices must be in the right locations. There are areas on the fringe of the City with shiny new offices that remain vacant in a submarket separated by a few streets and a gulf in value.
Employees need to get to the office easily and once there, they want to do more than just work.
Proximity to transport hubs with decent local amenities remains important, meaning that a building may not be worth the capital expenditure if it is not located within the right neighbourhood.
Some of our clients own contiguous central London estates and enjoy the option to engage in placemaking to drive portfolio values – a strategy unavailable to single asset owners in the secondary and tertiary market.
Occupiers are also changing the way some landlords market and manage their space in order to maintain value.
Tenants that need cost certainty or have uncertain future space requirements are turning to landlords that can offer flexible office space solutions, which does not necessarily need to be best in class.
To meet the demand, there is a growing trend for landlords to reposition their assets and offer a fitted office or managed office ‘flex’ solution.
Areas can be occupied on short-term leases or licence agreements, and owners without the in-house capability can appoint third parties to manage services for the space.
Not every owner can improve the credentials of an underperforming asset through redevelopment.
Rents and yields are yet to move enough to unlock the development potential of some offices and with construction costs remaining high, upgrades may prove prohibitively expensive.
Looking at living
Owners that are unable to upgrade or offload their offices can take the alternative approach of repurposing the building to an alternative use.
The living sector remains popular, and the anticipation of increased housebuilding following the election is adding to the attraction of this asset class.
For example, Lloyds Banking Group recently announced plans to redevelop a decommissioned data centre and office site in Pudsey into social housing.
In addition to student accommodation and the build-to-rent market, there could be lucrative opportunities for hotel conversions, such as the redevelopment of the Old War Office.
Even for those that are geographically blessed, the asset must be suitable for the intended use.
However, even where owners have the expertise to navigate the planning and construction process and have the capital to deploy, they will still need sites in the right location.
Other investors have been tempted by the potential returns promised by the life sciences sector.
Location, underlying asset quality and occupier will similarly play a role in framing these strategies.
The building will need to be within the London-Oxbridge golden triangle and close to education or research hubs.
Even for those that are geographically blessed, the asset must be suitable for the intended use.
Low floor-to-ceiling heights are not just unattractive to the office occupier of the future, but are also a non-starter for labs that require extensive specialist equipment.
The office market has contracted, but there will still be opportunities to develop or refurbish assets to accommodate the occupier of the future.
Ultimately owners will need to consider the merits of each building on a case-by-case basis and remember the key lesson in property: location, location, location.
Daniel Burnard is a real estate partner at BCLP