How big a challenge does the UK office market face?

Before COVID-19, about 9.7 million people in the UK worked in offices[1]. This substantial cohort was indirectly responsible for 46% of the UK’s output[2] and, by implication, a good chunk of its productivity. There is a body of research supporting the view that office environments can improve productivity[3], so it is reasonable to conclude that offices matter for economic growth and that their quality can impact the speed and quality of that growth.

What’s more, many British savers have direct stakes in how the sector fares. By value, there is around £263 billion of offices in the UK[4]; £29bn of this is covered by the MSCI Quarterly Universe, where it comprises 23% of held assets[5]. An estimated £7 billion of UK office assets are held by DB pension schemes, with around 37% in London and 63% outside the capital[6]. For those with property in their pensions, therefore, the fortunes of the office sector matter a great deal.

The picture is a forbidding one: utilisation data suggests UK offices are only around 32% full[7], market vacancies are at or near record highs[8], and overall values are at least -28% below their pre-COVID peaks – compared with -14% for all property[9].

The sustainability challenge

Data suggests that across Europe only 13% of offices are new and fit for purpose, 6% can be improved with little expenditure, and 18% are positioned well for future upgrading – but there is a bigger problem the remainder could face, one that could require either significant changes in usage or major interventions[10].

They could face the dual issues of stringent sustainability regulations and growing occupier demands for energy efficiency.

Although the 2050 deadline for net zero may appear a long way away, that is a timescale equivalent to just one or two traditional lease lengths. Even more pressing is the UK government’s 2030 deadline for all commercial non-domestic buildings to be rated EPC[11] B.

Even if targets shift or intervention is impractical, occupiers are still likely to insist on change, requiring investors to act. For example, in 2021, 227 of London’s corporate occupiers pledged to reduce emissions in accordance with the Paris Accord, creating urgent demand for highly sustainable workplaces[12].

So – offices are a crucial part of the British economy, their use is evolving rapidly, and their value has fallen relative to other sectors.

This is the first 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. We will publish three more over the coming weeks that will place the UK in a global context, consider where we are in relation to fair value and, finally, how investors might best address this radically disrupted sector.

[1] ONS, Total Employees in sectors we deem to be predominantly office based: Information & Communication, Finance and Insurance, Property, Professional Scientific & Technical, Business Administration & Support and Public Administration, 2019.

[2] ONS, output of the above sectors

[3] For instance: “Defining and Measuring Productivity in Offices” British Council for Offices, 2017

[4] IPF, The Size and Structure of the UK Property Market: End-2020, 2023

[5] MSCI Quarterly Digest, Q4 2023

[6] IPF, The Size and Structure of the UK Property Market: End-2020, 2023

[7] Remit Consulting, November 2023

[8] MSCI Quarterly Digest, various agents

[9] MSCI Quarterly Digest, Q4 2023

[10] JLL, European Office Market Stratification, 2024

[11] Energy Performance Certificate

[12] JLL, Sustainability and Value in the Regions, 2021