Recent CoStar data shows that the number of office construction starts across Britain has fallen to its lowest level in a decade. This decline, coupled with historically low vacancy rates for grade-A space in the West End and City of London, reflects a growing supply-demand imbalance that could complicate efforts by employers to bring staff back to the office.
Edward Matthews is chief executive of Mera Investment Management
A growing number of firms, particularly in finance, law and professional services, are stepping up return-to-the-office mandates. JP Morgan and Goldman Sachs were among the first to require employees to work five days a week from the office, with technology giant Amazon following suit. More recently, HSBC and Man Group announced plans to tighten their office attendance policies.
As demand for high-quality workspace rises, the physical infrastructure to support it is showing signs of strain. CoStar’s figures indicate that 23m sq ft of office space is under construction across the UK – down 3m sq ft year on year and the lowest level since early 2015.
In today’s constrained market, well-located new builds are more likely to secure pre-lets
This slowdown reflects the range of challenges that developers face, from high construction costs and economic uncertainty to planning bottlenecks and increasingly stringent sustainability regulations. Labour shortages across skilled trades have also contributed to project delays and budget overruns.
At the same time, demand for high-quality ‘plug-and-play’ workspace remains resilient. Vacancy rates for West End and City grade-A space hover near historic lows at just 1.6% and 2.97% respectively, according to data from BNP Paribas Real Estate.
Credit: Shutterstock / Sven Hansche
Since Covid, occupiers have become more selective, favouring high-EPC-rated properties in prime locations with top-tier amenities to entice workers back to the office. At Mera, we have noticed a marked uptick in the past year for finance for these types of office developments, with features ranging from fully kitted-out fitness centres and wellness rooms to dog-walking services and even hair salons.
For those employers enforcing return-to-office mandates, the shortage of available space presents a growing challenge. Difficulty in securing suitable workspace in desired locations can cause significant operational challenges, hindering recruitment and long-term growth planning.
Window of opportunity for investors
In contrast, for real estate investors, this environment creates compelling opportunities for strategic capital deployment. The slowdown in new construction is expected to sustain upward pressure on rents for prime assets with strong sustainability profiles and amenity offerings – properties that carry relatively low downside risk. At the same time, supply shortages enhance the appeal of core-plus strategies, especially those focused on repositioning assets through refurbishment and ESG-led improvements.
Lower-grade properties are increasingly trading at discounted levels, creating opportunities for value creation through intelligent repositioning. Investors that can navigate the complexities of retrofitting or redeveloping these assets stand to benefit from both capital appreciation and improved occupier appeal.
Moreover, the limited development pipeline opens the door for those willing to take on construction and planning risk. While speculative development remains limited, with disciplined underwriting and understanding of the types of developments occupiers now favour, investors can yield strong returns. In today’s constrained market, well-located new builds are more likely to secure pre-lets at premium rents.
The ability to deliver ready-to-occupy space aligned with tenant ESG goals could become a key differentiator in pricing and the speed at which space is filled.
The office sector in Britain is entering a new phase, characterised by divergence between quality and obsolescence on the one hand and occupier demand and development inertia on the other. The current lull in construction and reduction in available grade-A space suggests that this divergence is likely to intensify.
For employers, especially those advocating a return to the office, the timing mismatch between when they need space and when it becomes available could pose real problems. But for investors, the combination of limited supply, rising demand and asset discounts creates a rare window of opportunity.
Edward Matthews is chief executive of Mera Investment Management