The "times they are a-changing" for London offices in 2025 as £5 billion of global capital is ready to revive the dormant market for core investments, Knight Frank predicted at its annual London market update this morning.
Introducing the global broker's review of last year and its look-ahead, Phil Hobley, head of London offices, said a rueful goodbye to a tough 2024 before turning to the Bob Dylan biopic playing in cinemas.
"Dylan sings you had better start swimming or sink like a stone for the times they are a-changing," Hobley said. "Well we are swimming hard for our clients."
A key area of change flagged will be the return of institutional and global investment in core office investments, with Nick Braybrook, head of London Capital Markets, pointing out that the cycle has been unusual because of the near absence of prime, core asset activity last year as well as the lowest transaction volumes for 15 years at £6.2 billion.
He said: "There is now a growing pool of global institutional capital looking to capitalise on mispriced London offices. Much of this firepower will be focused on the lower risk, management cost and capital expenditure that prime, core stock offers."
Braybrook added that despite the historically low levels of activity in 2024, the first month of this year has already seen two very substantial sovereign wealth fund investments into London offices: the £1.45 billion joint venture at 2 Finsbury Avenue, Broadgate, as well as the Norges-Grosvenor transaction in the West End.
Braybrook added that Knight Frank also has two substantial core assets under offer, 20 Manchester Square and 70 Chancery Lane, to institutional capital.
"The market can only ignore for so long a severe occupational supply shortfall and rising rents on top of a major correction in prices, and we are now seeing that change.”
Knight Frank said Middle East and European institutions are expected to be the most acquisitive investors for “core” London offices this year, buoyed by asset values bottoming out, ongoing prime rental growth and reducing borrowing costs.
In addition, prime office availability in the City and West End are at near-historic lows given a development slowdown and demand being increasingly focused on new, modern workspaces
Core asset deals have been more affected by recent macro issues than other areas of the market. The global property consultancy’s 2025 edition of The London Series aggregates the investment requirements of 80 institutional investors and finds £5 billion of named institutional requirements looking to invest in “core” London office assets this year. Knight Frank defines this as "large, green-rated office assets with a secure, long-term lease and strong covenant terms agreed with a blue-chip tenant while also meeting modern workspace amenity and specification requirements".
Institutional investors, including sovereign wealth, pension and insurance funds, led by the Middle East (40%), Europe (36%) and Asia (11%) have set aside dry powder with 2025 deployment plans.
Knight Frank says this points to a recovery in larger London office investment deals, which have been muted over the last two years, materialising over the course of the year. Knight Frank is tracking 30 prime core assets above the £100 million price mark that are potentially buyable, Dan Dixon, partner in London capital markets and development said.
Knight Frank argues that low risk profile of core assets, given the minimum capital expenditure and asset management resources required, is fuelling growing appetite among global institutional investors to capitalise on what it sees as mispriced opportunities.
Core deals accounted for just £1 billion of investment transactions in 2024, representing 15% of total volumes.
Knight Frank says all-in borrowing costs for prime London assets have fallen from their peak of over 7% in 2022 to 5.5% now, making larger deals debt-accretive. Additionally, prime rents in a number of London submarkets are due to rise by over 20% over the next 4 years.
Leasing-wise the picture remains positive. Knight Frank London office leasing partner Abby Brown and London tenant representation partner Ellie McArdle said the clear change in the previous year was occupiers having "even greater conviction over decisions".
KF said more businesses than ever before are looking to move to new offices. Over the last 25 years the average percentage of London office occupiers vacating on lease expiry was 52.5%. This has increased to 77.4% over the last five years, with the transition to higher quality office space continuing to gather momentum.
The past five years have seen take-up of new or comprehensively refurbished space account for 60% of all lettings, peaking at 65% in 2024. This compares to 45% over the previous five years, according to Knight Frank.
It says the limited options in the development pipeline and inflationary cost of relocation is also creating a dynamic for regears where the asset is capable of ESG and amenity upgrade, representing asset management opportunity for landlords. A majority (90%) of lease regears and renewals tracked by Knight Frank in 2024 saw occupiers maintain or increase their office space, with 70% agreeing rent rises averaging £20.08 per square foot.
Ian McCarter, co-head London office leasing, said that with renewals there was a clear opportunity for landlords to be "creative" although they should remain "realistic" too.
Office availability across London fell by 2 million square feet year-on-year in 2024 to 23.9 million square feet, representing a 9.1% vacancy rate.
But the figures are highly nuanced. Knight Frank says availability in new, prime City and West End developments are near record lows, sitting at 1.1% and 0.3%, respectively. The overall volume of active London office demand stands at 11 million square feet across 190 named requirements, against a long-term average of 9.3 million square feet. London is expected to witness up to 41 million square feet of structural demand for space over the next five years, based on take-up levels induced by occupiers vacating office space on the expiry of their lease.
Speculative space under construction with a completion anticipated by 2028 totals 12 million square feet, with just 7.5 million square foot falling into the “prime” category. This could lead to a shortfall of almost 8 million square feet Knight Frank's Brown pointed out, given the current average levels of new and refurbished take-up. Prelet lead times now average 28 months for larger spaces, Knight Frank points out "reflecting the urgency amongst companies to secure high quality space in a constrained market".
There continues to be positive rental growth across London in 2024 of 4.3%, with City Core prime rents closing the year at £95 per square foot and West End Core at £160 per square foot.
Brown and McArdle said there are three potential outcomes this year for the leasing market. The worst case scenario is the economy deteriorates and a stay-put mentality gathers pace leading to around 9 million square feet of take-up. A middle ground outlook is for cautious recovery leading to around 10.5 million square feet of take up. The best case scenario is the economy surprising on the upside leading to as much as 12 million square feet of take-up and a post Covid-19 record. Knight Frank's bet is on the second of these scenarios.
Hobley said: “The prime end of the London office market has continued to demonstrate remarkable leasing resilience, creating an increasingly bifurcated market, which means that the new best quality space being delivered over the coming years will remain in high demand. More businesses than ever before are looking to upgrade their corporate headquarters, and the growing momentum behind office-first work policies is underpinning both investor and developer confidence. Our analysis of lease regears over the past year has also shown that companies in fact aren’t downsizing office footprints, since hybrid work arrangements still require businesses to be able to accommodate all their employees together in a building. The market dynamics provide for a positive rental growth forecast for London prime offices over the next 5 years.”