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While the economic backdrop deteriorates – although things may not be as bad as some of the headline figures suggest – the market seems finally to be showing some concrete signs of recovery, despite the political risks. To quickly summarise the key headlines:

• GDP is flatlining but there are signs it might improve in Q1;
• Inflation is ticking up again, but not enough to derail rate cuts;
• There has been a minor recovery in investment, although offices are still lagging;
• Despite office leasing in London and other major cities being robust;
• Retail Warehousing and Industrial remain top of the charts for returns – despite weak leasing figures for the latter;
• While house prices continue to tick up, there are vague signs of increasing development starts – but rental increases are no longer stratospheric.

Economic Backdrop

The economic mood music has certainly changed since the middle of last year. GDP was completely flat in Q3 (i.e. growth of 0.0%), and scraped 0.1% in Q4. Manufacturing, which saw a 0.9% fall, erased more healthy figures for services (+0.2%) and construction (+0.5%). This latter figure is the highest for over a year, and is perhaps an early indication of a revival in development – although it is unwise to take too much from one quarter.

However, tepid readings from some of the leading indicators, such as the PMIs, imply continued weak growth; Oxford Economics is now forecasting 1.0% growth in 2025 and 1.5% growth in 2026, down from 17% and 1.8% just a few months ago in September. However, the PMIs are showing some real divergence between services – which was still in slightly expansionary territory in February at 51.1, compared to January’s 50.8 – and manufacturing, at 46.9, down from 48.3. Higher input costs and lower global demand appear to be the main issues for the industrial sector.

Source: Oxford Economics

While there are concrete reasons for the slowdown, part of the picture is falling business confidence, which stood as high as +14.4 at mid-year, and now at just +0.2, is the lowest since 2022. The ICAEW (Chartered Accountants’ Institute), which publishes this, partly blames weakening demand but also attributes it to a combination of the NIC increases announced during the budget and the increases in the national minimum wage.

Having said all that, Oxford Economics argues that the PMIs have not been good predictors of GDP growth recently. They point to the stronger outturn for GDP in January (0.2%) and the strong increase in retail sales in the same month (1.7%) and argue that growth will accelerate over the next few months.

Meanwhile, inflation – as measured by the CPI – stood at 3% over the year to January, up from 2.5% in December. While economists do expect inflation to fall back slightly in February as a result of base effects, the rise in the energy price gap will mean that it will remain above 3% for much of the rest of the year. However, there are some signs that underlying services inflation and private sector wage growth are weakening, which could give the Monetary Policy Committee space to decrease base rates. At present, the expectation is that there will be three further cuts to the base rate over 2025, meaning it will end the year at 3.5%.

10-year gilt yields rose by over a percentage point between September and January, partly a result of concerns over the impact of the budget on inflation, partly a result of a rise in bond yields globally, as markets anticipated higher inflation after the election of Donald Trump. Over the past month, however, they have fallen by around 50bps, reflecting both the poorer economic news and the implication that the BoE is now in a cutting cycle. 5-year SONIA swaps, the most important data point for lending against property, have followed a similar (albeit rather less pronounced) trajectory.

There are now several conflicting patterns to watch. Falling base rates, relatively tame inflation and weak economic growth should push bond yields down. But at the same time, the supply of government debt is increasing – the public sector is borrowing and spending more, and that could accelerate over time with the need for more defence spending.

INVESTMENT VOLUMES

 

Some £14.6bn of property changed hands across the UK in the fourth quarter. This was 40.7% higher than Q3 and 37.7% above Q4 2023. It is also the highest total since Q2 2022, two and a half years previously. All sectors saw increases on both Q3 and the same quarter in 2024, with industrial and retail (the latter from a low base) leading the increase. Industrial volumes in 2024 overall amounted to £10.3bn, the highest since mid-2022; retail, at £8.4bn, the highest since Q3 2022.

Nevertheless, with the total for 2024 at £50.8bn, it remains one of the worst years in recent history, only outdone by 2023 (£38.8bn) and the pandemic year of 2020 (£49.0bn). But over recent months, sentiment certainly seems to have improved again from a low base across investment markets. This is probably a combination of a greater certainty around rate falls and a greater confidence that markets have repriced properly. It remains to be seen, though, given the time lags involved in property, how much of this is related to the greater business confidence of mid-2024. Anecdotally, though, funds do appear to be gearing up for higher levels of activity.

It’s worth comparing 2024 volumes to the 10-year averages for the various sectors, which highlight the relative popularity of individual segments – demonstrating that for the most part ‘beds and sheds’ still rule. Hotels are by far the most ahead of their long-term trend, explained by a one-off flurry of deals as well as genuine appetite for a sector that is recovering from the Covid shock. The appetite for residential is no surprise, and retail continues to recover from a base that is structurally much lower than 15 or 20 years ago. Industrial is slightly down, but that reflects a high average skewed by the Covid boom.

Segment	2024 Total	10-year average	Difference
Offices	£9.69bn	£20.05bn	-51.7%
Industrial	£11.40bn	£11.76bn	-3.1%
Retail	£9.41bn	£9.29bn	+1.4%
Residential	£9.14bn	£8.51bn	+7.3%
Hotels	£6.53bn	£4.90bn	+33.3%
Other	£4.63bn	£5.95bn	-22.20%
Total	£50.80bn	£60.46bn	-16.0%

It is the offices that are the real outlier – roughly half the typical level of activity. Indeed, if we exclude offices from the overall figures (which are 16% below the 10-year average), then the total is actually 1.7% ahead of the average annual volumes since 2015. The reasons for this are well-rehearsed: uncertainty over the return to the office – and what this means about future office demand; a concentration of the office stock in the most accessible locations; and environmental challenges – part of an increasing realisation that offices require a lot of attention if they are to stay relevant (these are all explored in our research piece from last year).

Is this reasonable, though, given the underlying fundamentals? Certainly, there is reason to be worried about some segments of the market – out of town or suburban locations without a strong story, or some second-tier cities. Some previously strong regional markets – such as Manchester – also don’t appear to have recovered that strongly from Covid, at least in comparison to London. But Central London itself seems very strong, albeit rather polarised (see below). Does this mean we are in for a recovery in London offices? Certainly, there has been a flurry of deals in Q1, with Green Street News reporting over a £1bn of transactions in January alone.

Stronger activity here could begin to change one of the side-effects of the office slump, the declining importance of London in the national figures. In 2024, London accounted for just 31% of national investment, compared to a 40% 10-year average and 47% for the 2005-2014 period. This does not reflect a waning appetite for the capital; far from it. The problem is that, especially when rated by value, the office sector is (massively) disproportionately weighted to Central London. In contrast, “beds and sheds” are more evenly distributed around the country, even if values remain significantly higher for all sectors in the capital.

Pricing across all sectors is remarkably stable at present, with yields as reported by most advisors barely changing over the past few months. The market is in a “holding pattern” – convinced that rates will decline, but not quite sure when. At various conferences recently, 4% has been mentioned as the magic threshold; if nothing changes, that might well happen by the end of the year, although there are plenty of risks to that.

On the fundraising side, 2024 represented a low ebb for real estate, with PERE reporting just $1.13bn raised globally over the year. This is the third consecutive year of declines, representing a 50% fall from the peak. This does not look great for the short-term prospects, but anecdotally interest in real estate is beginning to rise (from a low base). If 2025 does indeed see this trend reverse, then it could augur a much-improved 2026.

MSCI RETURNS

MSCI’s UK Real Estate Index shows similar trends – in terms of the popularity of different sectors at least. Industrial tops total returns (4.9%), followed by retail (3.8%), residential (3.4%) and Hotels (2.0%). Offices is in distant last place and the only segment with negative total returns (-3.6%). It’s worth noting that every sector apart from Industrial (+0.4%) is still seeing negative capital growth; retail’s high return figure is because of the strength of income returns (6.0%); i.e. it has much higher yields because of the scale of recent capital value readjustments.

But capital growth is by far the worst for offices; over the past year, the segment lost 8% of its value, compared to 3.0% for hotels, which is the next worst performer here. What is remarkable, though, is the difference in market rental growth. At 3.1%, it is higher than retail and hotels, suggesting that the fundamentals are relatively good. So why the sharp fall? Perhaps it is a reflection of the uncertainty and polarisation outlined above, but it’s more likely a reflection of the global negativity towards offices. This, in turn, is a reflection of the US experience, which for various reasons – higher structural vacancy, greater tendency to work from home – has been rather worse than on the side of the Atlantic.

Having said that, the performance of Central London offices has been somewhat better, with total returns of 0.9% in the City and 3.1% in the West End, driven by lower levels of capital losses. The market still looks a little sceptical about these locations, but much less sceptical than the segment as a whole.

Source: MSCI

Given the stabilisation of values and the slightly improved outlook, the IPF’s regular consensus forecasts show a marked improvement in returns in 2025 and beyond – even if the hierarchy hasn’t changed. These are shown in detail at the bottom of this document.

RETAIL SECTOR

Given retail’s recent renaissance, it’s perhaps time to dig into some of the differences within the segments – it’s a very varied sector.

Source: MSCI

Retail Warehousing (in parks, that is) is still by far the strongest performer of almost any property segment, with a total return of 12.7% – much higher than industrial – off the back of strong capital growth and high-ish income returns. Out-of-town shopping centres are not far behind, but here they are driven mostly by income returns (as a result of such strong value corrections over recent years). The strength of supermarkets and standard shops is also a story of income, as capital growth here is basically zero. The worst performers are standard shops in London and the South East – somewhat puzzling as the former has high income returns and the latter the strongest rental growth in the entire sector. Does that suggest that high street retail is next in line for a renaissance, particularly given what might be happening to retail sales?

LEASING TRENDS

Going back to the office market, geographical polarisation is backed up by the fundamentals of the various markets. The chart below shows office leasing in different locations – Central London, the Big 6 (Manchester, Birmingham, Glasgow, Edinburgh, Leeds and Bristol) and the rest of the country. For the major urban office markets, volumes were hit hard but have returned to close to their 10-year average.

For the rest of the country (the green bar), the story is different – it has not recovered and remains well below trend. Of course, there are individual markets within this that are doing well (Cambridge for example), but the trend is obvious. The office market is increasingly polarised and given that most investors concentrated on London (above all) and then the other major cities (to a much lesser extent), it can’t be long before this story hits home and investment regains at least some proportional interest.

Source: CoStar

Now here’s the weird thing. Leasing has obviously held up better in the big six than in the rest of the country. But look at what’s happened to construction volumes – they’ve collapsed in the major cities but have held firm in London and the rest of the UK. Indeed, the space under construction in the ‘big six’ is the lowest it has been for over a decade. This would suggest that the regional cities are walking into a supply shortage and that there’s going to be a real need for development. Of course, the problem is that with rents rather lower than in London, viability is more challenged by rising construction costs – but how can we explain the relatively robust figure for the rest of the UK?

Source: CoStar

The buoyancy of the office leasing market (at least in certain locations) stands in contrast to the industrial segment. While this is still very much in demand among investors, leasing activity does seem to have slowed down substantially, as the graph below shows. However, there are all sorts of reasons – from greater inventories to the continued increase in online shopping – for believing that this is a cyclical pause not a structural downshift.

Source: CoStar

HOUSING MARKET

According to nationwide, prices rose again in November after falling slightly in January. The average, at £270,493, was some 3.9% ahead of February 2023. But this conceals some significant regional differences – price growth in all the Midland and Northern regions is above 4%, while in London and the South East it is below 3%. This reflects the greater affordability pressures higher rates have produced in the South.

The ups and downs of the bond market have had an impact on the mortgage market, though, with the average rate up a few basis points over the past few months. The average 2 year and 5 year fixed rate deal rates now stand at 4.6% and 4.2% respectively – only slightly lower than a year ago, although quite a bit below the ‘bump’ seen in the middle of the year. Perhaps unsurprisingly, mortgage approvals fell back slightly over the year.

Meanwhile, private rents – as measured by National Statistics – rose by 0.4% in January, the lowest figure since 2022. This is equivalent to an annual increase of 4.9%, which is more in line with the modest figures in some other more timely indices. (London was even lower at 0.3%). Although it is only one month, it does confirm the general picture for rents – still rising, and ahead of inflation, but the era of 10%+ increases is over.

On the development side, there are signs that activity is increasing. Q3 was the third quarter in which housing started to rise, admittedly from a very low base. The number of units consented over the previous 12 months rose slightly in the third quarter, for the first time since 2022. On the other hand, the number of planning applications overall – both received, decided and granted – fell in Q3. Molior’s measure of London housing units applied for did rise at the end of the yea,r however, so it doesn’t seem unreasonable that the Q4 figures (yet to be released) might show a reversal in the trend.

Source: National Statistics

summary

In summary, while there are plenty of risks out there – not least the trade war that seems to be kicking off at the time of writing – the statistics do seem to imply an inflection point, or a potential inflection point, in many areas. It’s easy to be gloomy given the geopolitics and the issues around the UK economy, but from a real estate point of view at least, 2025 should be the year in which selected office and retail locations recover, and where development starts to happen again – at least in residential. This will no doubt come as a relief to a government focused on providing new housing, even if that 3 million figure still looks like a stretch.

If you have any questions about this briefing note, or any other aspect of the commercial or residential market, please contact jon.neale@montagu-evans.co.uk. We also carry out bespoke research for clients to inform strategy, guide policy or aid in individual sites or developments.

*This research has been prepared for general information purposes only. It does not constitute any investment, financial or other specialised advice or recommendations, and you should not, therefore, rely on its contents for such purposes. You should seek separate professional advice if required.

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The government’s promise of 1.5 million new homes over the parliamentary term was reinforced last week in the Prime Minister’s reset and in the new NPPF.

Central to this thinking, alongside planning policy changes around housing targets and grey belt development, is a new wave of New Towns.

In September, the government announced that cities and local government expert Sir Michael Lyons would chair the New Towns Taskforce, supported by Dame Kate Barker as deputy chair. Barker was the author of two very influential reports on housing and planning in the 2000s, which have shaped much of the debate in those areas since. Their remit is to recommend locations for “large-scale communities” of at least 10,000 homes each.

The launch release states that “a new generation of new towns and large-scale urban extension could play a significant role in the government’s plans for economic growth as well as offering new homes on an ambitious scale”.

To understand how effective this might be – it’s perhaps worth looking back at the original New Towns, understanding their origins and impacts, and anticipating what some of the issues might be this time around.  

A couple of months ago, the direction of travel for the economy and the property market looked clear. Inflation was falling back; bond yields and interest rates were on a firm downward trajectory; and the economy, while not exactly firing on all cylinders, was looking substantially better than it had done for quite a while. In turn, there were early signs that deal volumes would soon increase; confidence was returning, and with it, there was the expectation that several indicators would turn positive (albeit slowly and very patchily geographically and by sector). Today, this is still the base case, but it has a few more caveats.

Two events – the UK Budget and the US Election – have meant that while it is still the most likely scenario, it may be slower to arrive and perhaps more selective than previously thought. The main factor here is the US Election, given its world-changing implications. Moreover, while the domestic budget is more of a ‘known known’, the return of Donald Trump to the White House is more of a ‘known unknown’ as his exact agenda remains unclear, as parts of it were self-contradictory.

In this quarter’s newsletter, we look at:

1. The UK Budget
2. The US Election
3. What does this all mean for property?
4. The current state of the market
5. In summary

The UK Budget

The UK Budget – and some accompanying documentation – contains some important industry-specific announcements, but the most important aspect was the change in fiscal policy (taxation, borrowing and spending) and what that has meant for financial markets.

The expectation – the inevitability – was that the budget would raise taxes (in some form) and increase both spending and borrowing. This is not a political comment; the previous government, perhaps understandably given the election, had set an impossible fiscal trajectory given spending and investment requirements. However, what happened was rather more about all three of those that had already been priced.

The overall settlement implies £30-£40bn more borrowing each year over the parliamentary term, rather than the £20bn expected. This means more government debt – more bonds – which in turn means lower prices and, since they move in opposite directions, higher bond yields. But that’s not the only factor pushing up that all-important 10-year gilt figure. The market also judged the budget to be slightly inflationary. This is mainly because of the additional spending but also because of one of the key ways in which the additional £40bn in taxes over the next financial year will be raised – increases in employer National Insurance Contributions (NICs).

The rate at which this is charged will increase from 13.8% to 15%, and – more importantly – the threshold at which this kicks in will reduce from £9,100 to £5,000. This will increase costs for employers, which will either affect their profitability or force them to increase prices, or both.

I am not for a second suggesting that tax rises are a good thing (or indeed a bad thing), but if you are going to introduce them, this seems a little counterproductive. Pushing up prices will increase inflation, which, in turn, will lead to higher base rates and interest rates than would otherwise be possible. (And higher prices are political poison, as the US election has shown). Raising revenue in more direct ways (say through income tax) would be much less inflationary, but the government had boxed itself in with promises not to increase taxes “on working people”. Arguably, this will very much do that, just indirectly.

To be fair, bond yields were going up internationally anyway before the budget, and some of these measures were expected. But the likelihood of (a) more UK government bonds being sold and (b) higher UK inflation than previously expected partially explains why the yield on UK public debt (10 years) went up by almost a quarter percentage point between 29th October and 6th November.

However, since then, the MPC has cut base rates by 25bps, and yields have fallen by about 12 basis points, reversing almost half the gain. Dig into the data, and the situation looks a bit volatile, which is unsurprising given everything that’s going on – although the situation has somewhat stabilised at the time of writing.

So this does not – at least not yet – look like the reaction to the Liz Truss ‘minibudget’ when bond yields pushed out more quickly and decisively (by pretty much a whole percentage point in a week). It does, though, suggest that the base rate will be cut more slowly than previously thought. (See below because we need to digest Trump’s potential impact on property, too.)

Elsewhere, the budget also increases capital gains tax rates, from 10% to 18% at the lower band and from 18% to 24% at the upper. While this is obviously not great for property owners, it was a less substantial increase than expected and does, after all, equalise (standard) CGT with residential CGT. There were also changes to reliefs around inheritance tax for agricultural land and premises, which have proved controversial but could, on the margins, lead to more land coming forward to development, assuming the planning taps are turned on.

There were also some changes to business rates, with the multiplier reduced for smaller leisure and hospitality premises, to be paid for by raising it on those with rateable values of over £500,000. For more details on this and wider points around the system, please refer to the piece written by our Head of Rating, Josh Myerson.

The US Election

Last week, Donald Trump, in contrast to late polls, won a definitive victory in the US election. And with the House and the Senate looking like they will be Republican-dominated too, he will be free to pursue the agenda he was elected on: tax cuts, tariffs and some pretty big shifts in how the US deals with geopolitics.

Those tax cuts explain why equity markets did well – tax cuts being good for corporate America – and also why Treasury bond yields rose – as those same cuts are assumed to be inflationary, pumping more demand into the economy. Tariffs, by increasing the price of foreign-made goods, would have the same impact. (A 25 bps cut in Treasury rates followed, taming the market somewhat.)

Trump has promised a 60% tariff on goods made in China and a 10-20% tariff (depending on which speech you read) on imports from everywhere else. This would, needless to say, have a dramatic effect on the world economy – and Britain’s. The Centre for Economic and Business Research, for example, thinks it would cut UK growth rates by about half.

While manufacturing is not as important to the UK’s economy as, say, Germany’s, the US is one of the few countries with which we have a trade surplus in goods. On the other hand, with the UK outside the EU, there is the potential for a carve-out deal, or a trade deal, which could reduce or remove the problem – and as we all know, Trump is keen on deals. However, that might not go down well with our immediate neighbours who, despite Brexit, remain our largest trading partners in aggregate.

Of course, no one knows which parts of the programme Trump will follow through on or how long it will take to draw up and negotiate tariffs, which is why the risks here are perhaps rather more long-term, even if they might lead to more uncertainty in the short-term.

What Does All This Mean for Property

 

The gilt yield has a big impact on our markets, mainly because it represents the risk-free rate against which property yields are measured. It also indirectly affects debt costs. This is quite easy to understand; in theory, at least, government debt is the safest investment available. As property is inherently riskier, then investors some sort of premium above this level to justify buying it, otherwise they may as well simply go for theoretically safer government bonds. So if gilt yields rise or fall, then so should property yields.

At present, base rates are now expected to fall more slowly than before. While Oxford Economics’ forecast of 3.75% by the end of 2025 is being retained for now, market expectations – which were at around the same point – have risen by 50bps since the budget and Trump. This should imply that gilts will continue falling but at a reduced pace compared to before.

So, the same logic applies to property yields and to pricing. Things are still going to get better gradually for market activity, but even more gradually than before all this happened. The same applies to the housing market, where mortgage rates will probably still decline, albeit at a slower rate. The question is whether this poses risks for one of the government’s central domestic policy planks – increasing housing supply.

Current State of the Market

Although the mood music changed a little over the Summer – with talk of more deals on the table – that isn’t yet visible in the data. Investment volumes in Q3 were £9.4bn, the lowest for a year – although they were above the figure for the same quarter in 2023. All sectors were down except industrial and offices, which had a comparatively strong three months. Residential was particularly weak, although it’s misleading to read too much into these statistics, as the long-term picture is still that the living sector is seeing a greater share of activity while offices are in decline.

 

Investment Returns haven’t changed hugely since the last quarter, with industrial still leading the pack with a 4.9% annual return and offices the laggard at -3.6%. The notable change has been the shift in retail’s position, which is now at 3.8%, ahead of residential; this reflects the high (6%) income return in the segment and lowered levels of capital losses.

The leasing market is showing some signs of resilience, particularly in Central London, where net absorption appears positive, supporting rental growth. While industrial leasing is down on the boom of a couple of years ago, it has remained historically very respectable levels. There is also some good news in the housing market; prices are more buoyant, and the start is up (from a low base), even if planning applications are still at a low ebb, which brings us conveniently to some of the other measures in the budget.

Many of the other measures announced at the same time as the key fiscal changes demonstrate how seriously this government takes increasing the housing supply; in other words, they’re mostly about planning and enabling infrastructure. So there is an additional £500m for the affordable housing programme, 300 additional planning, additional funding for initiatives such as the Cambridge Growth Company and the Liverpool Docks Regeneration, and commitments to both East-West rail (Oxford-Cambridge) and the HS2 line coming right into Euston.

The government also announced that it will be publishing a Planning and Infrastructure Bill in the New Year. This will provide more detail on precisely how the government intends to reform planning – as well as controversial areas such as Hope Value around Compulsory Purchase Orders (CPOs) and whether this will have a key part in the new generation of New Towns Labour wants to initiate. This will be accompanied by a 10-year infrastructure strategy – which presumably will dovetail with housing and planning policy providing rail, road, digital, energy and water links to where housing growth needs to happen.

There are a few issues with all of this – not least how affordable housing will be ramped up given the problems in the sector, which might leave you asking whether councils will need to be more involved. Most obviously, though, there’s the issue of whether mortgage rates will remain relatively high, meaning that it’s harder to drive the sort of increase in housebuilding the government wants to see. But it all sounds good, at least for the residential sector – by which I mean there’s little mention of commercial in recent planning missives.

In Summary

The world has certainly become more volatile over the past month. In particular, inflation is now expected to stay higher for longer (while still coming down).

This means that the Bank of England will be slower in cutting rates, with some forecasters already putting up the end-2026 figure by 25-50bps. This means debt costs – and, with them, property yields – will be higher for longer, too. And while the trajectory remains unchanged, the longer-term risks look a bit more worrying, with the prospect of higher inflation driven by a very different US policy environment. (It will take time for a tariff regime, for example, to be drawn up, passed and executed).

However, there are wider factors pulling inflation down in the longer term, and the Bank of England seems committed to a cutting agenda. So – without any future shocks, a big ‘if’ in today’s world – the investment and development markets will continue to improve, just at a slower pace than before. The residential sector, supported by the government and favoured by investors (if slightly behind industrial), looks most likely to be the outperformer.

To learn more, please contact Jon Neale.

*This research has been prepared for general information purposes only. It does not constitute any investment, financial or other specialised advice or recommendations, and you should not, therefore, rely on its contents for such purposes. You should seek separate professional advice if required.

The industrial and logistics sector continues to attract strong investor interest globally, driven by e-commerce growth, supply chain resilience, and robust demand across geographies. While vacancy rates have increased and economic pressures have impacted take-up, the outlook is improving as inflation falls and demand for logistics space rises, particularly in the UK.

However, the development of new space in London remains complex, with competing land uses, such as housing and data centres, contributing to this. Navigating the evolving planning landscape will be key to unlocking future opportunities.

The full report on London’s industrial market is available for download below 👇

*This research has been prepared for general information purposes only. It does not constitute any investment, financial or other specialised advice or recommendations, and you should not, therefore, rely on its contents for such purposes. You should seek separate professional advice if required.

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For some time – since widespread high-speed broadband, at least – it has not been necessary to be in an office to carry out productive office-type work. The emergence of networking and video conferencing has made this even more feasible. However, it took the enforced conditions of the Covid-19 pandemic lockdowns to introduce it en masse to the workforce. Initially, many employers found this satisfactory and did not note any productivity losses, with some executives arguing that the “office was dead” and that firms could cut costs by jettisoning office space.

With the end of Covid-19 restrictions, remote work has continued to be more popular than before, although many senior managers began to express concerns over effectiveness some time ago and have tried to bring staff back to the office. The most popular route has been towards a ‘hybrid model’ where 2-3 days in an office are combined with 2-3 days at home.

However, more recently, some leaders have called for a greater return to the office against the background of more general issues around national productivity. There is extensive academic evidence showing the benefit of physical agglomeration, face-to-face contact and informal information exchange to innovation and productivity. On the other hand, the US, with perhaps the highest WFH tendency, has seen very fast productivity growth since the pandemic.

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These problems are already evident in office market metrics. Offices typically accounted for 40-50% of UK investment volumes between 2001 and 2015/16. This figure has been in consistent decline for almost a decade now and has recently been closer to 25-30%. The increasing attractiveness of sectors such as residential and industrial may also be factors against the backdrop of tight pricing.

However, more recently, it is likely to be related to Global concerns over the future of offices driven Primarily by the us experience. And while the UK’s office market appears stronger than in many other geographies, investor demand has fallen back. Between 2001 and around 2015/16, offices almost Always accounted for 40-50% of UK investment Volumes. This figure has been in consistent decline For the past few years and has recently been closer To 25-30%.

Leasing has not been as badly hit as investment, with volumes across the whole of the UK 36% below the 10-year average as of the year to Q2 2024. But what is perhaps more telling is how different markets have performed. The City Core was only 5% below the long-term average, while Outer London was 37% below. And while the major city cores outside London have seen a 38% fall, their hinterlands are some 50% below long-term trends.

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What happened to jobs? Over the past decade, office job growth has become more concentrated in a handful of locations, to an extent that has not been particularly appreciated by business or policymakers, let alone the general public. Over the 10 years leading up to the financial crisis – 1998 to 2008 – 50% of new jobs were created in some 48 Local Authority areas and 75% in 121. In contrast, over the 10 years leading up to the end for 2022, half of additional jobs were created in just 23 Local Authority areas, and the figure only rises to 77 at the 75% level.

Rewind to 1998-2008, and the picture is somewhat different. The top 20 features out-of-town locations such as West Northamptonshire, South Gloucestershire, Milton Keynes, Swindon and North Yorkshire.

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The single biggest quantifiable threat to many offices is their poor environmental performance. Part of this is driven directly by legislation.

Under Minimum Energy Efficiency Standards (MEES) legislation, The UK Government has already made it unlawful to let or sell buildings with an Environmental Performance Certificate (EPC) rating of F or G. It is consulting on making B the minimum permissible rating by 2030, with a possible intermediate step of C in 2027. Given some of the issues around EPCs – namely, their lack of reliability and questions around their relationship with actual building performance – the Government has also previously considered introducing an alternative measurement system. This would likely be along similar lines to the Australian NABERS certification, which involves measuring actual operational carbon emissions and energy efficiency. This would be unlikely to make the problem less significant.

At the same time, businesses’ own requirements are becoming more stringent. Many have their own plans to reduce carbon emissions based around either net zero or science-based targets, which mean it will be hard for them to own, stay or move to poorly performing buildings. Even if the rate of change slows or government goalposts are shifted, the direction of travel is apparent – which means that the poorer the environmental rating of an asset, the less attractive it is as an investment. Furthermore, occupiers know that younger employees are increasingly environmentally aware and prefer to work (and stay) at companies that demonstrate their sustainability credentials – and what is more public and obvious than their premises? This is part of a wider trend in which offices and workplace design support corporate branding as well as recruitment and retention. Investors, who must take a longer-term view, are also critically aware of these factors and increasingly see poor environmental performance as a major risk, whatever the regulatory system.

Until more reliable measurement systems are in place, EPCs remain both the only real comprehensive source of data, and as they are legally binding, they are of great importance to the office market. There is a huge geographic variation, which is partly a result of the underlying distribution of offices (which are highly concentrated in London and a few other centres) but also the longer history of where these buildings have been constructed and how.

It is also difficult to generalise about how much it will cost to retrofit office buildings, as it varies significantly. However, there are tools emerging such as our own ME:EStimate, which provide rapid, reasonable indicative estimates of retrofit costs. Such estimates can help inform early-stage thinking on refurbishment versus change of use.