London Office Market Sees Recovery Amidst Space Shortage

London's office market recovery is gaining momentum as a shortage of new developments and rebounding demand for space reduce vacancy rates. Office prices have risen 6% year-over-year, and leasing activity increased 40% in Q2, pushing the three-quarter trailing average to its highest since before the pandemic. The supply shortage is being driven by a lack of new projects and a bounce back in demand as staff return to the office.

London's office market is showing signs of recovery, with vacancy rates declining and prices rising, according to recent data from CoStar Group Inc. [1] The market has been buoyed by a lack of new development and a rebound in demand for space, with prices up 6% year-over-year at the end of June. This recovery is particularly notable given the prolonged impact of the pandemic on the office sector.

The second quarter of 2025 saw a 40% increase in leasing activity, pushing the three-quarter trailing average to its highest level since before the pandemic. This surge in demand has started to eat away at the city's historically high vacancy rate, with 1 million square feet more space being occupied than vacated in the first half of the year. This compares to a 1.7 million square foot loss of occupied space in the same period a year earlier [1].

The supply shortage is being driven by a lack of new projects and a bounce back in demand as staff return to the office. A series of demand shocks, soaring construction costs, and an uncertain outlook have deterred developers from committing to new projects. This has led to a shortage of top-quality new space, with companies seeking bigger premises to avert desk shortages [1].

Investor sentiment towards the sector has also improved, with prices gaining 2% in the second quarter of this year. However, prices remain 16% below the peak achieved in the third quarter of 2021 when the market enjoyed a boom fueled by record low borrowing costs [1].

Major investors are beginning to show interest in the sector. Aware Super, an Australian pension fund, has invested about £500 million ($672 million) in London offices in a little over six months, snapping up properties in Marylebone, Mayfair, and the City of London [1]. However, appetite for larger transactions remains muted, with high-profile properties such as the Can of Ham building at 70 St Mary Axe and Brookfield's CityPoint Tower being withdrawn from sale before a deal was concluded [1].

The recovery, however, is uneven, with some segments of the market showing stronger signs of recovery than others. The MSCI UK Quarterly Property Index shows rental growth in Central London offices is concentrated in higher-quality assets, while lower-quality, high-yielding properties are seeing a more modest uplift [2]. This divide is not limited to London, with Paris's central business district office rents rising while La Défense rents fell in 2024 [2].

The key to success for real-estate investors will be picking assets that can thrive in the post-pandemic era. Those that do not meet required criteria or are unable to due to various types of obsolescence are at risk of further loss [2]. The commodity office as an investment class has very few takers, and the data shows there is a long tail of poorly performing offices where capital values likely have further to fall [2].

References:
[1] https://www.bloomberg.com/news/articles/2025-07-21/london-office-market-recovery-gathers-pace-due-to-space-shortage
[2] https://www.msci.com/research-and-insights/blog-post/the-office-market-recovery-is-here-just-not-everywhere