Sustained market dynamics and broader operational pressures will drive greater divergence in occupier behaviour, which is key to unlocking the full potential of the London office market.

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Introduction

Market behaviour and performance is always shaped by the interplay between supply and demand. The post-Covid period has seen the market diverge from traditional norms, driven by profound structural changes and broader economic uncertainty, with an associated recalibration of market metrics.

In last year’s London Series, we observed that demand and take-up levels were recovering, albeit slowly and steadily, after a period of conjecture and reassessment. At the same time, supply-side confidence had weakened, with surging construction and borrowing costs effectively stalling the development pipeline and the refurbishment of obsolete office space. This generated an acute imbalance between supply and demand. Subsequently, polarisation become a watchword for the market, leading us to redefine prime rents and reset their levels.

A year on, what has shifted?

Has the market dynamic evolved? How are occupiers responding?

And, ultimately, what does this mean for market performance?

In our view, while recognising current volatility, conjecture is giving way to conviction on the demand side; however, with that conviction comes greater variability in response. That is a good thing, as it will unlock the London office market.

To illustrate this, the paper first provides a market supply and demand update, before exploring the options available to London office occupiers in 2025 and beyond.

The Supply & Demand Dynamic

Supply

A review of current availability and the development pipeline highlights growing constraints on prime space as supply falls short of demand.

Available Supply
Across London there is 23.9m sq ft of available office space, down almost 2m sq ft from the peak in mid-2023, reflecting an overall vacancy rate of 9.1%. 

This reduction has been driven by a fall in the availability of both of new or refurbished space (0.4m sq ft) and second-hand space (1.5m sq ft). The latter reflects the withdrawal of obsolete buildings for redevelopment and a reduction in available sub-let space.

These headline numbers, however, mask significant market nuance, not just on a geographical basis but also by the quality of supply. We have updated the definitions we apply to determine the quality of office space, as shown in the table opposite.

Utilising these definitions, prime availability is 6.7m sq ft – representing a vacancy rate that averages 2.6% across London.

In the City (1.5%) and West End (2.5%) prime vacancy is lower than the London average, whilst rates are above average in the Southbank (5%) and Docklands (3.8%) submarkets.

Southbank is, however, a perfect example of increasing market nuance. The prime vacancy rate for the entire Southbank submarket– which comprises Vauxhall/ Battersea, Southbank Core and Canada Water –is above the London average at 5%.

However, in the most established Southbank Core the rate is much lower at 2.5%. Higher prime vacancy rates in new districts are not abnormal, given that they have low stock levels. Accordingly, available space in relatively few buildings can paint a misleading picture of the supply-side dynamic.

Low levels of prime availability are now a central feature of many of London’s submarkets, with 10 of the 21 displaying prime vacancy rates below the London average.

In the City, all submarkets except Aldgate/Whitechapel, have prime vacancy rates markedly below the London average. In the Midtown and City Core submarkets, prime vacancy rates are barely 1%, while in Clerkenwell/Farringdon the rate is 1.8%.

In London’s largest submarket, the City Core, prime availability relates to 21 buildings, with most of the available space in smaller size band buildings. In fact, there are just six available buildings larger than 40,000 sq ft and only two that are greater than 100,000 sq ft. 

In the West End’s two largest submarkets, the lack of available prime space is also very evident. In Victoria, there are four available prime buildings, representing a vacancy rate of 1.1%. In the West End Core, there are only five available buildings – representing a vacancy rate of 0.3% – all of which is in smaller size band buildings. In the West End Core, there is just a single building that would meet this requirement.

It is clear from our analysis that the supply dynamic at the prime end of the market remains incredibly tight, with a vacancy rate of just 2.6% across London, and with core locations even more restricted. However, the availability of space below our revised definition of prime remains high, with Grade B and C space equating to a combined 9.3 million sq ft across London at the end of 2024.

Grade C space, all of which has an EPC rating of D or below, accounted for 2.9m sq ft of this total. Clearly, this space has significant exposure to obsolescence through impending changes to MEES regulations.

Some of this space will pose challenges to landlords and will require repositioning (and expenditure) to attract and retain occupiers. Our definitions of Grade B and C space, however, are broad and encompass office space which varies in specification, location and amenity.

The Development Pipeline
The development pipeline, which consists of almost 450 potential and under construction schemes, is unlikely to ease the strain on the provision of top-quality space.

Although recent completion levels are broadly in line with long-term averages, they have not kept pace with the level of new and refurbished take-up. At the end of 2024, annual take-up of better-quality space was nearly 2.4m sq ft higher than the level of completions (4.5m sq ft) – at the end of 2019, the gap was 500,000 sq ft.

Speculative space currently under construction totals 11.9m sq ft, with completion anticipated by 2028.

Our analysis of this pipeline shows only 7.6m sq ft meets our updated definition of prime. Moreover, the current pipeline of Prime and Grade A space falls well below average levels of new and refurbished take-up. By 2028, this implies a potential shortfall of almost 8m sq ft.

The Potential Development Pipeline
We have conducted a deep dive of the potential development pipeline – schemes with consent and those being prepared for planning – and assessed the viability of each scheme built. The full potential pipeline is sizeable, standing at 36m sq ft. However, we rate only 4.3m sq ft of this as being ‘most likely’ to be built – that’s only 12% of the total pipeline. These are schemes with financing secured and planning consent achieved or expected to be achieved with minimal opposition and, in our view have a probability range of 50-75% of completing. There is a further 11.2m sq ft of potential pipeline that we rate as ‘likely’ – with a probability range of 25-50%. Furthermore, only one-third of this ‘most likely’ or ‘likely’ space meets our definition of prime.

The consequence of a modest committed development pipeline is that many occupiers wishing to upgrade the quality of their office space have brought forward their search requirements well ahead of lease events and the lead-in times for pre-lets have increased. Schemes under construction are achieving lettings on average 14 months ahead of completion, rising to 28 months prior for office units exceeding 100,000 sq ft.

DEMAND
While the pandemic challenged traditional perceptions of the office, rhetoric has given way to reality. Demand remains resilient, with steady occupational activity and transactions reaffirming London’s enduring appeal.

Take-up
Annual take-up for 2024 closed out at 10.6m sq ft, in-line with take-up in 2023, but below the post-pandemic peak of 11.5m sq ft transacted in 2022. The average annual take-up volume has fallen from 11.9m sq ft (15-year annual average) to 11.4m sq ft (10-year annual average) and then a further fall to 9.4m sq ft (5-year annual average).

Admittedly, the most recent average is skewed by the depressed leasing activity seen in 2020, but even if this year is excluded the post-pandemic average take-up for London equates to 10.4m sq ft. In our view, this represents a recalibration in London office take-up volumes.

What is undeniable is that there has been a heightened and sustained focus on quality. In the five years prior to the COVID-19 pandemic, take-up of new or refurbished space accounted for an average of 45% of overall take-up. Since 2020, the average proportion has increased to 60%, peaking at 65% in 2024. This ably illustrates the ‘flight to quality’ and has been one of the key outcomes of occupier decision-making over the last five years.

Active Demand
Encouragingly, active demand – named requirements placed in the market – has also shown consistent growth. Occupiers brought a net addition of 500,000 sq ft of active requirements in each quarter of 2024, a reflection of the welcome return of larger occupiers to the market.

The overall volume of active demand has increased post-pandemic, with 11m sq ft of active demand across 190 named requirements recorded at the beginning of 2025, against a long-term average of 9.3m sq ft. It is worth noting that the level of active demand is not spread evenly across each London submarket, with a strong focus from occupiers on core locations with the best access to major transport hubs.

Over one third of current active demand comes from the financial sector, reinforcing London’s status as a global financial powerhouse. The professional services sector accounts for over 3.4m sq ft of active demand, driven by continued activity from law firms as well as an uptick in activity from large consulting firms who now have a clearer picture of their real estate strategies and requirements alongside upcoming lease events. The IT and technology (ITT) sector is the source of a further 1.2m sq ft of requirements, up 42% y-on-y. This is impressive given the relative absence of the tech titans from the market and depicts a diverse blend of sub-sectors including gaming, artificial intelligence and enterprise software. This endorses London’s position as an innovation-led city, as noted in the first insight paper in the 2025 London Series.

Structural demand
As we identified in the inaugural London Series, structural demand – demand induced by occupiers vacating their office space on the expiry of their lease – is the bedrock of London’s occupational market. A review of lease expiries across London between 2025-2029 reveals that is potentially 52.9m sq ft of structural demand, which averages out to 10.6m sq ft per annum.

Of course, not all structural demand leads to relocation. According to the MSCI Lease Event Review dataset, over the last 25 years the average percentage of London office occupiers vacating on lease expiry was 52.5%. This has increased significantly – to 77.4% – over the last five years. If one applies this 5-year average weighting to the total volume of lease events between 2025-2029, it infers that 40.9 million sq ft of structural demand is likely to emerge by the end of 2029. There is also geographical nuance in this structural demand, with five submarkets exposed to more than 2 million sq ft of lease expiries between now and 2029. The City Core has the highest volume of projected submarket demand over the next five years, with 13.6m sq ft of expiries anticipated by the end of 2029, once adjusted for the MSCI weightings. However, the City Core is the largest submarket and as such distorts the granular analysis across all London submarkets.

Looking beyond the City Core shows there is strong structural demand in submarkets such as Midtwon, Clerkenwell/Farringdon and the West End Core.

There are additional layers of demand within the London office market, which are not always captured in lease event or active demand data. Cyclical demand, for example, refers to demand generated from occupiers’ responses to the wider-economic environment. Employment growth is important in this respect, with Oxford Economics predicting 6.1% total growth in London office-based employment by the end of 2029, taking employment from 3.75 million people to over four million.

A further source of demand is occupiers currently located in flex spaces ‘graduating’ into conventional leased space. Then there is the demand generated by new market entrants and business transformation or disruption. 2025 is expected to see an uptick in M&A activity, with Deutsche Numis reporting that 84% of private equity firms surveyed expect to complete 5-10 deals in 2025, up from just 12% in 2024. This M&A surge is also recognised by Willis Towers Watson, with technology-driven deals at the forefront and likely to have a London dimension. An emboldened corporate America might also be a stimulus to the London market, both indirectly through M&A but also directly through growth and expansion.

PwC’s 2025 Global CEO survey ranks the UK second only to the U.S. as a global destination for capital investment.

While conducted in late 2024, and not fully reflecting recent headwinds, the UK’s strong global position should export expansionary demand.

So, the market context, in many ways, remains a familiar story.

Supply & Demand Dynamics in Summary
On the demand side, take-up is solid but recalibrated, with a historically high share of transactions concentrated in new and fully refurbished space. Prospects remain strong, underpinned by a robust pipeline of active requirements driven by upcoming lease events.

When coupled with the supply-side dynamic, it is clear that the last year has merely served to exacerbate the supply-demand imbalance, particularly at the upper end of the quality spectrum.

This imbalance has fuelled what is often called a ‘flight to quality’; though ‘fight for quality’ may now be more apt. Intense competition for the best space has driven strong rental growth and expectations, further strained by a development pipeline that has failed to replenish supply. This is the defining story of London’s post-pandemic leasing market – one of increasing constraint.

Those constraints are acutely felt by most market participants. The market needs unlocking – and we believe that subtle shifts in the occupier mindset will be the key to doing so.

THE SHIFTING OCCUPIER MIND-SET

Drawing on insights from our tenant representation and occupier research teams, we recognise several themes shaping the mindset of the occupier that will be influential in their real estate decision-making in 2025 and beyond.

A volatile economic and operating environment dents business sentiment
At the beginning of 2025, UK business confidence has declined to levels not seen since late 2022, largely due to recent tax increases.

The latest Purchasing Managers' Index (PMI) data illustrates current business activity. The UK Composite PMI, which includes both manufacturing and service sector companies, slipped to 50.4 in December, the lowest since October 2023, and reflects subdued demand, rising costs, and a cautious business environment as firms navigate the current economic challenges. It should, however, be recognised that, encouragingly, London’s PMI readings are more positive and show a marginal improvement at the end of 2024.

Poor or declining sentiment brings real consequences. Employment in the office-occupying services sector declined for the third consecutive month, with December experiencing the steepest reduction since January 2021.

There are several contributory factors. The latest UK Budget introduced £40 billion in tax hikes, notably higher National Insurance Contributions, which has significantly raised operational costs for businesses. Forty-one per cent of respondents to the latest ICAEW survey identified the tax burden as a growing challenge, up from 29% the previous quarter. As well as being volatile, UK inflation has remained above the Bank of England’s target and has led to increased input costs and pricing pressures. Equally, the interest rate environment continues to impact on both borrowing costs, prompting many firms to delay investments, reduce hiring intentions, and focus on cost-cutting measures to navigate economic uncertainties.

Growing cost sensitivity
Unsurprisingly, the macro-economic and operating environment is fuelling growing cost sensitivity. Many in the property sector worry about the rent sensitivity of the occupier, particularly when polarisation and supply shortages have served to drive prime rents higher. This has not been particularly apparent to date. Deals have continued to complete at new prime rental levels, real estate costs continue to represent no more than 10% of an occupiers overall operating costs, and in real terms prime net effective rents in London’s core sub- markets have fallen.

However, aligned to declining sentiment, wider cost concerns are emerging at the start of 2025. Greater scrutiny is being placed on total occupancy costs, with service charges, tax and wider costs of occupancy all in greater focus. More amenity rich spaces command greater service charges, there is the upcoming revaluation of business rates, and the cost of fit-out has spiked significantly. This, coupled with recent changes to business taxation and national insurance contributions, are heavily impacting on the bottom-line, leading many businesses to seek to protect capital. So, it would be folly to suggest that cost sensitivity will not influence occupier behaviour going forward.

Amenity – functional over flash?
Amid this cost sensitivity, 2025 will also bring some resetting of occupier requirements with respect to amenities. The flight to quality in the market has seen landlords enter an amenity arms-race whereby they seek to differentiate product with novel amenities. Flashy high-end amenities such as roof-top bars, fitness centres or lavish loungers – will remain attractive to some occupiers and are often utilised as a branding tool or a draw for talent.

Many occupiers are shifting their focus to functional amenities that directly enhance productivity, employee well-being, and operational efficiency. They prioritise spaces that work – offering quiet zones, ergonomic workstations, and collaborative areas that foster teamwork and creativity within a tech-enabled, seamless environment.

As workstyles evolve, the focus has moved beyond flashy extras designed to lure employees back to the office. Instead, occupiers seek compelling yet functional environments that genuinely support employee productivity and satisfaction.

With cost considerations in mind, they are also looking to maximise shared amenities in common areas, to optimise efficiency and return on investment within their own leased demise.

Flexibility – aligning real estate and planning horizons
Over the last decade, the great challenge for occupiers has been to bring greater alignment between real estate commitments, ever shortening business planning horizons and more frequent shifts in strategy and focus. Despite the clear shortening of average London lease lengths – down to 6.6 years in 2024 compared to 7.7 years in 2014 – and the rise and maturation of the flexible offices sector, this remains a key consideration, particularly given current global economic volatility. Smaller scale requirements, or larger occupiers who have distinct project teams, will continue to draw on flexible office product.

ESG – how far and how fast, amid a changing political climate?
Finally, ESG considerations are at a crossroads. The question of ‘how far, how fast?’ is becoming increasingly evident in discussions with occupiers. The momentum behind sustainability has been strong, particularly amongst larger listed companies facing mounting pressures from regulators, employees and consumers to demonstrate responsibility in their practices. As we have noted since 2020 in our (Y)OUR SPACE research, the gap between corporate ambition on ESG and action in the real estate markets has, however, been significant and slow to close.

Many occupiers are increasingly mindful of a changing tone and tide. Donald Trump’s return to the White House is likely to produce a row back on regulation and the further downplaying of ESG initiatives by Corporate America. This may influence a wider reassessment of corporate commitments to ESG principles, with the pace of adoption slowing amidst the changing political climate. Many will, of course, continue to pursue goals at their own pace, recognising the long-term benefits of a sustainable and socially responsible corporate image. This will also be true of the supply side, particularly as a means of creating and protecting long-term value. Like all things, a balance will need to be struck – in this case between regulatory expectations, market supply and corporate values.

SHOULD I STAY OR SHOULD I GO? FOUR OCCUPIER PATHWAYS FOR 2025

We have been consistent in our message that real estate is a strategic consideration for the occupier. Rather than being a box to put employees in, the office has become a device to drive, support or embody wider business strategy and confer competitive advantage. This strategic consideration has been amplified by the noise generated in the pandemic and post-pandemic period. The office is now an emotive and newsworthy topic, on which everyone has a view. Scrutiny is heightened.

Businesses must balance the significance of their real estate decisions with the urgency imposed by market dynamics.

As a result, occupiers will move, must move, from conjecture to conviction – a shift that will be pivotal for the entire market.

The ‘stay Vs. go’ decision has never been more critical. It is a decision that generates four distinct pathways.

Pathway 1:

Go: Continuing the flight to quality
At the upper end of the market, the flight to quality, and the associated rise in rents, will continue. As supply dynamics further bite, the fight for such space will intensify and become more costly. We have, as an example, seen strong competition for space on floors of over 40,000 sq ft in the City which has directly resulted in rapid upwards rental movement.

Occupiers taking this route will be all-in, using the upgrading to best- in-class space to drive wholesale transformation; there is no shortage of transformative intent amongst UK CEO’s. According to PwC’s 28th Annual UK CEO survey, just released, 98% of respondents expect to make material changes to their business or operating model during 2025. Furthermore, 34% believe that their business will not be economically viable within ten years if it carries on its current course. 

Two subtle adjustments to this flight to quality will be in evidence in 2025. 

First, we expect greater stringency and due diligence around the quantum of space being sought. There will be a strong focus on both space optimisation, as well as a wider consideration of which business functions need to be located in core London offices.

Second, given the clear current and future shortfall in high-quality options, occupiers will need to take a more creative approach to finding solutions in the market – the second of our occupier pathways.

Pathway 2:

Stay then go: Partner to pre-let and shape the solution.
During 2024 there were 2.1 million sq ft of pre-lets across London, broadly in-line with 2023 pre-let volumes, with two-thirds of deals in the City and a third in the West End.

Historically, pre-lets were the domain of the very largest occupiers. That is changing. We have monitored the average size of pre-lets which have fallen by a third over the last 10 years in London. Again, geographical variation exists. The average pre-let size in the West End has reduced by 43% to stand at 40,101 sq ft. In contrast, the City has seen more modest reductions (14%) to an average size of 63,838sq ft.

From an occupier’s standpoint, a key driver of this smaller pre-letting activity is the flexibility which can be built into transactions via option space. If a 50,000 sq ft occupier is committing to a pre-let on average 20 months ahead of the building’s completion (28 months for occupiers over 100,00 sq ft) then option space becomes almost a necessity given the occupier will typically operate over a three-year planning horizon. Pragmatically, from a market perspective, optionality also allows occupiers to scale over time without needing to go back into the market or split operations across sites. This has been exemplified by Kirkland & Ellis at 40 Leadenhall, Dentons at 1 Liverpool Street and Qube Research & Technologies at n2 in Victoria.

It is worth noting, however, that in securing those pre-let options occupiers are at the same time having to commit to longer-lease lengths for core space. This serves to underline the need to establish certainty around the very minimum amount of space an occupier requires. It also endorses our view that the flight to quality, particularly via pre-let, will be dominated by fully committed occupiers seeking to drive and support wholesale business transformation.

The pre-letting route has three market implications. First, with occupiers now looking earlier and earlier for pre-let opportunities, landlords need to be ready to engage and partner. There is a significant opportunity for both parties to gain – the occupier benefits through a tailored solution, whilst the developer gains the opportunity to future-proof the asset. Second, this pathway requires both occupier and developer to take an even longer-term view on the market. Third, from a developer standpoint, given the reduction in the size of pre-lets, derisking development is no longer simply about holding out for that one big occupier.

Pathway 3:

Stay: Renew/regear to kick the can or carry on.
In the current climate the previous two options will not be for every occupier. We are witnessing a growing preference for staying in place rather than relocating, again influenced by that combination of market dynamics and wider business challenges. Limited availability of Prime space that meet occupiers’ criteria is a significant factor. With few viable options, many occupiers are compelled to seriously consider remaining in their current locations, a trend reflected in the rising percentage of clients now exploring this option compared to last year. 

Beyond supply constraints, decision-making is becoming more protracted and staying is the way of buying time.

For some, time simply runs out.  Larger occupiers may find themselves entering the market too late to secure appropriate or better solutions, forcing them to pause, renegotiate their current leases, and revisit their plans later.

Of course, where existing building bones, location, amenity and energy efficiency standards permit, the ‘stay’ option is much more straightforward and much less disruptive operationally.

In this sense, we expect to see the proportion of occupiers exiting space on expiry during 2025 (which we previously noted, has been running at 77.4% over the last five-years) start to recalibrate back towards the long-term average of 52% or  lower.

Disruption also plays a role. For many businesses, if relocating does not promise transformative benefits, the upheaval can often outweigh potential advantages.

This pathway has implications for the market. Refurbishments are expected to rise as occupiers seek to upgrade existing spaces. Landlords are likely to focus on retaining tenants, enhancing functional amenities, and offering competitive incentives. The ‘Stay’ trend is reshaping how occupiers and landlords navigate London’s commercial real estate landscape and again has a vital role in unlocking the market from its current imbalance.

Pathway 4:

Go: The emergence of value occupiers.
In 2025, we expect to see the rise of value-orientated occupiers as businesses grapple with the burden of increased operating costs and the consequence of constrained supply. These occupiers will adapt by making compromises to meet their operational needs while managing financial pressures.

Some will prioritize affordability over premium features, opting for spaces with lower quality or specification standards. Others may expand their search beyond traditional submarkets, targeting other submarkets and London’s new districts where costs are more manageable, and availability at the required quality may be greater.

Size reduction is another common tactic, as seen with a consultancy firm initially seeking 15,000–20,000 sq ft. To secure value without sacrificing quality, they revised their requirement to 8,000 sq ft and incorporated flexible working policies to manage headcount. While this is an extreme example, occupiers will look to reduce space by 10-20% to achieve greater value.

Increased cost mitigation will also drive demand for managed and serviced spaces, particularly those with landlord-fitted solutions, as occupiers seek to minimize capital expenditure on fit-outs.

MARKET IMPLICATIONS IN 2025 AND BEYOND

In our view the big change in the London leasing market in 2025 will be the variability in occupier response and requirements. This has implications for take-up volumes and for rental performance across the market.

Outlook for take-up

The overall picture for demand looks solid rather than spectacular, driven by continued churn from lease events and increased conviction and momentum from active requirements in the short- term. However, the macro environment is clearly challenging and, coupled with an associated shift in the occupier mindset, will bring more variance in behaviour and,  subsequently in our outlook for take-up.

We see three scenarios based on the current market dynamics, macro factors and changes in occupier behaviour.

Scenario 1:
The economic outlook continues to be poor and occupier sentiment declines significantly, with real estate decision-making suffering consequently. A greater number of occupiers decide that ‘stay’ is the better option over the short and the medium term, bringing a decline in take-up volumes to circa 8.5-9.0 million sq ft of take-up in 2025.

Scenario 2:
The economic outlook still presents challenges, but business sentiment picks up as inflation falls and prospects of rate cuts rise. More occupiers explore relocation options offering relative value, but this doesn’t have a negative impact on leasing volumes.

Occupier decision-making is still more truncated when compared with previous cycles, but take-up remains steady compared to the post-pandemic average at 10-10.5 million sq ft of take-up in 2025.

Scenario 3:
The economy sees better growth than anticipated, and inflation falls faster than forecast. Occupiers’ see opportunities for accelerated growth which fuels increased demand for office space over the short and longer term. Supply constraints curtail market activity, particularly in the most undersupplied submarkets, but 11.5-12.0 million sq ft of take-up is achieved, a post-Covid high point.

Our expectation is that the scenario 2 is most likely, signalling the continuation of market momentum but across a greater part of the market both in terms of quality of supply and location of product. This will be reflected in rental dynamics.

Outlook for rents
Cost scrutiny demands innovation CFO’s are under pressure like never before. Business confidence is fragile, the outlook  uncertain, costs are rising, fixed expenses are climbing. To date the market has tolerated high rents to secure the best space – and for those seeking true transformation that will be a price they will have to pay. However, rents are just a slice of the cost burden. Business rate revaluations are just one example where fixed costs could be pushed higher still going forward. Greater scrutiny on the costs associated with each of the four pathways outlined is occurring, as is pushback. Right now, it seems that this pressure is only likely to intensify. 

Such an environment demands innovation from the supply-side. Managed solutions that cut upfront capex are a case in point. Rising fit- out costs in central London offices are reshaping the landscape for value focussed occupiers, presenting challenges for both landlords and tenants. These escalating costs, driven by inflation, supply chain disruptions, and increased demand for premium materials and sustainable designs, can deter potential tenants or reduce their willingness to commit to long-term leases. For landlords, higher fit-out expenses may lead to extended void periods as they negotiate tenant incentives or tailor spaces to meet occupier demands.

Additionally, tenants face tighter budgets, potentially compromising workplace quality or seeking alternative locations. These pressures underscore the need for creative leasing strategies, flexible office solutions, and cost-efficient designs to maintain competitiveness.

Prime rents continue their upward path
Our five-year outlook for prime rental growth in Central London reflects a balanced perspective on short-term challenges and long-term opportunities. We have raised our forecasts for rental growth in the City Core and West End Core, where the current imbalance of demand relative to supply is expected to offset economic headwinds. In other submarkets, we have broadly moderated our 2025 forecasts due to lower levels of business confidence, driven by recent changes to business taxes, which are likely to temper near-term occupier demand. However, we remain optimistic about the longer-term trajectory for rental growth. Structural imbalances in the office market, including a constrained pipeline of high-quality office developments and sustained demand for modern, sustainable workspaces, provide a robust foundation for rental increases.

These factors, combined with Central London’s enduring appeal as a global business hub, suggest a resilient market for continued recovery and growth beyond 2025.

Over the next five years, we anticipate that certain Central London submarkets will outperform in terms of rental growth. These are the locations where we see the greatest potential for an undersupply of best-in-class office space and where the introduction of the Elizabeth Line has significantly enhanced connectivity. Submarkets such as the City Core, West End Core, Clerkenwell/Farringdon, and centrally located West End submarkets within the catchment of the new Tottenham Court Road station, such as Bloomsbury, Soho and Strand/Covent Garden are experiencing high levels of occupier interest, driven by their accessibility and the concentration of modern office developments. These areas are poised for robust rental growth, with projected five-year annual average growth rates of 5.8% in the City Core, 5.2% in the West End Core and 3.5% in both Clerkenwell/Farringdon and the area around Tottenham Court Road station.

The economics of development are becoming more favourable
In recent years, office development activity in London has faced significant headwinds. A combination of limited development financing, rising interest rates driving prime and secondary asset repricing, soaring construction costs, and a shortage of viable sites has constrained new projects.

However, the outlook has improved markedly. If current conditions persist, more projects could progress to construction as viability concerns ease. That said, projected under-supply over the next five years is unlikely to change significantly, given the protracted transition from planning to construction.

Several factors are driving this improved outlook. First, interest rates have peaked, and policymakers have begun a rate-cutting cycle, with independent forecasts predicting a notable decline in 10-year government bond yields. This is expected to put downward pressure on office yields, bolstering capital values. Second, yields for both prime and secondary offices have stabilised, following significant corrections. Additionally, sterling's depreciation against major currencies has enhanced London’s appeal to overseas investors. Lastly, tender price inflation has moderated and expected to ease further.

Forecasts suggest tender price inflation will average 3.6% annually in the medium to long term, while rental growth is projected at 5.2% per year in the West End Core and 5.8% in the City Core. If yields remain stable, these rental trends point to rising capital values over the next five years - a trajectory already evident in prime asset performance.

Improving development viability is further supported by strong occupier demand and constrained supply in the City and West End Core. However, sustaining this momentum requires underwriting projects based on market-adjusted site values rather than outdated peak-market assumptions. Misaligned valuations can distort feasibility assessments and undermine financial viability. By aligning pricing with current conditions, developers can more accurately assess returns and capitalise on a strengthening rental environment.

Secondary rental performance will be (selectively) bolstered
We expect improving demand for secondary quality offices. These spaces are likely to appeal to a specific bracket of occupiers seeking greater value in a cost-conscious environment. Secondary offices, particularly those offering functional spaces with good connectivity and manageable overheads, will remain an attractive option for businesses balancing budget constraints with their operational needs. This dynamic will help sustain activity in the secondary office market even as the prime sector adjusts to broader economic pressures.

The delta between rental growth for the best London offices and those of poorer quality has increased markedly in recent years, with MSCI data showing a 13.0% increase since March 2020 for the highest quality spaces, compared to just 1.4% for poor quality offices. In the West End Core, this equates to a £65.00 per sq ft gap between prime and secondary rents, and £25.00 per sq ft in the City Core. Looking across London as a whole, the delta is £32.69 per sq ft, a 43.7% differential.

Improved demand and this clear delta allows landlords to maintain a consistent income stream, provided they adapt their offerings to meet the functional and budgetary needs of tenants seeking value in a competitive market.

Uplifts in renewal rents
Renewal rents are becoming an increasingly strategic element of the London office market, as more occupiers move towards stay rather than go options. In 2024, 90% of lease renewals we tracked maintained or extended their space, will 70% resulted in an increase in rent, with an average uplift of £20.08 per sq ft. This trend underscores a fundamental shift in occupier behaviour, where the decision to renew isn’t just about avoiding disruption but is instead a pro-active, value-driven choice. For many businesses, the cost and complexity of relocation in volatile times, coupled with  a limited supply
of quality space, mean that remaining in place can be the most practical and financially viable option.

From a landlord’s perspective, lease renewals present a crucial opportunity to maintain rental growth while securing long-term occupancy. Compared to the overall trajectory of prime rents – up £32.50 per sq ft in the City Core and £52.50 in the West End Core over the past decade – renewal rents remain competitive while offering a stable revenue stream. They key takeaway is that renewals should not be viewed simply as defensive moves to prevent vacancy but rather as a mechanism to strategically capture value. Landlords who leverage this dynamic effectively can balance rental increases with occupier retention, ensuring that both parties benefit. In a market where quality space is limited and relocation costs continue to rise, renewals will emerge as a critical pathway for many occupiers and an opportunity for landlords to secure improved income.

UNLOCKING THE LONDON OFFICE MARKET

The intersection of established market dynamics and emerging macro forces is poised to reshape occupier behaviour in the London market. This paper has identified four specific pathways that will become more evident in the market as we move through 2025. The relative balance between these approaches remains to be seen and will clearly
be the culmination of decision made by a wide range of occupiers, each with different circumstances, aims and requirements.

Occupiers must weigh these opportunities and pitfalls of each carefully, aligning their chosen pathway with financial priorities, operational needs, and replace with market realities. A well-considered strategy will position the business to transact in the market and thrive in the city.

The sheer diversity of occupier strategies will also encourage competition and innovation among landlords and developers, raise the viability of development across all grades of space, and, critically, better allow the replenishment of stock that is obsolete, or at risk of obsolescence.

While imbalances between prime supply and demand are likely to be a market feature for a while still, 2025 will, in our view, represent the starting point for a broader, deeper, more diverse market offering opportunity and performance for a wider range of market participants.

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