11 Apr 2024 5 min read

After a period of radical change, how are UK offices performing compared with the rest of the world?

By Bill Page

The post-Covid performance of the British office market has been between the extremes of the returns delivered in Asia and America. Why is this, and what does it mean for investors?


Although offices are clearly being used less since the Covid-19 pandemic, the full extent of the change in demand and how it will change in the future are still open questions.

Widely quoted data from Remit Consulting shows utilisation in the UK running at about 32%[1] of potential capacity – an estimated 60-70% of pre-Covid rates[2]. However, Transport for London data shows that weekday tube use is only 13% below the same base[3] – although the data is consistent that attendance drops off on a Friday).

Looking at office trends across the world provides some clues as to why we are seeing these utilisation differentials, although some crude generalisations are necessary. In many Asia Pacific markets, for example, office use has returned to pre-Covid levels. This is perhaps due to a combination of good public transport, office air conditioning, corporate cultures, and – most of all – a lack of residential space for comfortable homeworking in the region’s many densely populated cities.

Meanwhile, many European central business districts (CBDs) have higher utilisation and lower market vacancy rates than the UK. Again, this is probably a combination of affordable and available public transport, difficulty in setting up a comfortable home office, corporate cultures, and CBD amenities. For example, the spread in vacancy rates between the ‘corporate’ Paris of La Defense and the city’s historic and amenity-rich CBD is notable in this regard.

Turning to the US, congested roads for commuters, relatively plentiful space for home working and a greater share – in some cities – of tech companies that were quick to embrace remote working, partly explain a slower return to offices. In the UK, however, it seems combination of corporate culture, expensive and sometimes unreliable public transport and a variety of domestic working setups explains why our utilisation rates fall somewhere in between the Asia-Pacific and US experiences.

Is the UK pretty vacant?

Since the end of 2019, vacancy rates in the UK have increased from 11.4% to 16.4%[4]. The range between asset quality is significant, with stock older than 1995 seeing vacancy increase from 11.1% to 25.9%[5], while offices built after 2010 have seen vacancy rise from 7.4% to 7.7%.

There is similar polarisation in rental performance. We think part of this is down to sustainability fundamentals, and there is good evidence for rental premia based on certification[6], but it is also likely to be down to fit-for-purpose specification providing needed amenity and flexibility. We expect this polarisation to be structural.

Although it does make intuitive sense, this trend does represent a departure from history. There has always been a strong correlation between vacancy rates across all quality grades and rental growth for the very best space. Since Covid, however, that relationship has broken down, with rental growth for good stock continuing while overall market supply has risen. Furthermore, agents are tracking more occupiers seeking quality space than there are available units[7]. This is driving rental tension that is unlikely to dissipate, in our view.

Investors have understandably been nervous of offices, given continuing uncertainty over where fair value is and how much capital will need to be spent to both compete for occupiers and meet sustainability requirements. Lenders have been reluctant to lend without high margins. Although deal sizes can be lumpy, the proportion of the sector’s investment volumes has fallen from a pre-Covid average of 37% to 25% over 2023[8].

On the MSCI benchmark, values are -28% lower than the pre-Covid highs and -26% lower than the peak of the last property cycle in June 2022[9]. But, as with occupational markets, there is significant polarisation in investment performance.

Higher yielding offices, as a proxy for risk and quality, have seen values fall -42% since Covid, while lower yielding offices have seen a decline of -23%[10]. And this is in average valuations, which are known to lag direct market pricing. Recent deals suggest values may be -40% lower or more[11], with poorer quality offices or locations bearing the brunt.

In addition, we believe there is further risk to pricing. We have not yet seen the full effects of leveraged investors exiting real estate, nor disposals of any meaningful scale emanating from the Pension Risk Transfer (PRT) from fully funded DB schemes. Both are likely to add to office investment supply ahead of other sectors in our view, given the greater relative income risks they face.

We think this will drive pricing lower, all else being equal, although some would say this would be welcome if it hastens price discovery. Overall, there is more nuance in the office debate than ever before, and overtly simple narratives should be avoided.

We are frequently asked if offices are the new retail – in other others, if homeworking is a structural change affecting this sector in the same way ecommerce did retail. We think this is unhelpful as they are two fundamentally different asset classes. For example, there is nothing in the office sector analogous to the over expansion by debt-laden occupiers in a retail sector still adjusting to ever-growing ecommerce penetration.

That said, one thing they do have one thing in common: an ability to offer forward-thinking investors the chance to adapt via more appropriate leasing structures, depreciation mitigation, location discipline and occupier engagement. Investors will want to know, though, whether these requirements are reflected in yields.

This is the second in a series of blogs where we set out some evidenced views on the office market and what its recent evolution could mean for institutional investors. In the next blog in this series, we will consider how far away the UK offices sector is from fair value – and what we need to factor in to determine this.


[1] Remit Consulting, 2023

[2] We estimate offices were 60-70% utilised before Covid

[3] London Datastore, Public Transport Journeys by Type of Transport

[4] MSCI Quarterly Digest, Q4 2023

[5] MSCI Quarterly Digest, Q4 2023, LGIM Real Assets calculations

[6] For example, see Knight Frank, the Sustainability Series, 2021, which measured a 12.3% premium

[7] Data from CBRE, for instance, shows but there are 14 Central London requirements seeking over 150,000 sq. ft., 11 of which are City requirements. Central London new Availability (which includes schemes under constructing delivering within 12 months pipeline) has nine buildings over 150k in it, of which three are in the City.

[8] RCA

[9] MSCI Quarterly Digest, Q4 2023, LGIM Real Assets calculations

[10] MSCI Quarterly Digest, Q4 2023, LGIM Real Assets calculations

[11] See FT.com, 6th February 2023, “Canary Wharf office takes 60% hit in distressed sale” as an extreme example

Bill Page

Head of Real Estate Markets Research

Bill is LGIM Real Assets' Head of Real Estate Research. He has responsibility for the formation of house views and inputs into fund strategy. He has 20 years’ industry experience. He is a voting member of the Real Estate Investment Committee and actively contributes to the platform’s office and industrial strategy.

Bill joined LGIM Real Assets in October 2012, having spent seven years at JLL where he was EMEA Head of Office Market Research. Prior to JLL Bill worked at Estates Gazette Group. He chaired the British Council for Offices’ Research Committee between 2015 and 2018 and sits on the IPF Research Steering Group.

Bill graduated from Lancaster University with a first class degree in geography. He holds the IMC certificate and IPF Diploma.


Bill Page