Major developments and investments reshape London’s office market

The London office market in 2025 is undergoing significant transformations, characterized by strategic shifts among major property owners, evolving tenant preferences, and a dynamic investment landscape.

Landsec, one of the UK’s leading commercial landlords, has announced a strategic pivot from traditional office investments to residential properties. The company plans to divest £2 billion worth of office assets, reducing its office holdings from 65% to approximately one-third of its £10 billion portfolio by 2030. This move aligns with broader industry trends favoring sectors like housing, which offer steady, inflation-linked income streams. Despite maintaining a 98% occupancy rate in its office spaces, Landsec aims to prioritize income growth and mitigate exposure to market cycles by focusing on major residential projects in areas such as Lewisham, Manchester, and North London.

Tenant demand is increasingly polarized, with a pronounced shift towards high-quality, sustainable office spaces. Over 60% of current space under offer comprises newly built or refurbished properties, reflecting tenants’ preferences for modern amenities and flexible layouts. Conversely, lower-quality office spaces face elevated vacancy rates, prompting landlords to consider refurbishments or conversions to alternative uses. This trend underscores the critical role of quality and sustainability in leasing decisions, ensuring continued activity in the Grade A segment.

The investment market is showing signs of recovery, with Central London office investment volumes increasing in January, bringing the 12-month total 16% above the same period last year. Notably, Axa IM Alts has submitted plans for a new 46-storey skyscraper at 63 St Mary Axe, estimated at over £750 million, marking its third skyscraper project in London since the pandemic. This development aims to meet the demand for high-quality office spaces, featuring advanced facilities and eco-friendly features, with completion projected for the 2030s.

Additionally, Aware Super, one of Australia’s largest pension funds, plans to invest up to £1 billion in London’s office sector in partnership with property group Delancey. This move is seen as a significant vote of confidence in the sector amidst high interest rates and uncertainties around post-pandemic demand.

Looking ahead, the London office market is expected to maintain its momentum in 2025, driven by a flight to quality as occupiers seek more space rather than less. Modern occupiers desire ESG-aligned office spaces with terraces and high-quality amenities, leading to intense competition for the best assets, with tenants prepared to pay premium rents. However, challenges persist, including elevated vacancy rates for lower-quality stock and stricter EPC regulations requiring minimum ratings of C by 2027 and B by 2030, which will pressure landlords to refurbish or retrofit their properties. This regulatory landscape, combined with hybrid working patterns, is expected to widen the gap between Grade A and Grade B spaces, further reinforcing the two-tier market.

In summary, the London office market in 2025 is characterized by strategic repositioning among major landlords, a clear tenant preference for high-quality, sustainable spaces, and a cautiously optimistic investment environment, all of which are reshaping the future of the city’s commercial real estate landscape.

Sources: FT and The Times