Lower interest rates and a tentative economic recovery have improved confidence across the real estate finance market in England and Wales, particularly in the office sector. Transaction activity in this sector has increased as a consequence of falling interest rates, stabilised working patterns post pandemic, and strong occupier demand for high-quality, modern workspace. Private equity is returning to the market with investors increasingly targeting office assets.
What occupiers want: quality over quantity
A defining feature of the current market is the growing divide between premium and secondary office stock. Businesses recognise that high-end, well-designed office environments are vital to attract and retain talent, and they are prepared to pay premium rents to secure quality office space.
As a result, occupiers are becoming increasingly selective. Location remains as important as ever but design, functionality, and sustainability are also being prioritised. Occupiers are now focused on quality over quantity (they are no longer interested in simply counting desks). Modern and sustainability-driven amenities such as onsite showers and bike storage are increasingly valued alongside traditional quality markers reflecting a greater focus on employee wellbeing.
Where suitable Grade A space is unavailable, occupiers are more inclined to extend existing leases rather than compromise on quality and many are prepared to pay a premium for space that meets their needs.
The flip side of this is that at the other end of the market, landlords with older and less premium assets face a difficult picture. Where the capital expenditure required to make necessary upgrades is prohibitive, landlords may need to pursue alternative uses for such properties.
Supply constraints
This shortage of supply and increased competition has also led to an increase in pre-lets with businesses securing office space during the construction phase to avoid missing out on already limited opportunities.
Rents continue to be driven upwards by the constrained supply, particularly where demand is concentrated on centrally located, Grade A office space.
Beyond London
As high-spec office space (usually central London) remains highly competitive, occupiers priced out of premium areas will need to look further afield. CBRE predicts a shift in demand to peripheral areas, particularly amongst larger corporate occupiers who require good quality space.
This shift presents significant opportunities for both landlords and investors outside the capital. Cities such as Bristol, Leeds and Manchester offer attractive prospects for investors seeking to capitalise on rising rents and redevelopment opportunities. Illustrating this trend, Savills reported last week that Birmingham's office market has recorded its strongest fourth quarter performance since 2017.
Looking forward
The outlook for the office sector in England and Wales is positive. With debt market conditions stabilising, we expect to see consistent transaction activity in the real estate finance market, with lenders focusing on well-located, high-quality assets. Strong demand for Grade A space and increasing rents should sustain deal flow as investor confidence strengthens.