The UK office market is experiencing a significant shift as buyers are paying, on average, 18 percent less than the asking price for office properties. This marks the most substantial discount since the global financial crisis in 2009, according to data from CoStar, a property analytics group. The tepid demand is particularly evident for older and less eco-friendly office blocks, as buyers increasingly seek modern, green buildings with state-of-the-art amenities.
In the past, during the office market’s peak around a decade ago, buyers would often pay over the asking price. As recently as 2019, landlords were generally able to secure the price they asked for. However, the current market has seen a notable change in dynamics. For instance, 140 Leadenhall Street, a nine-storey office near the Cheesegrater building in the City of London, was put up for sale for approximately £30 million but reportedly sold in June for closer to £20 million. Similarly, Oxfam House in Oxford, the charity’s British headquarters, sold for £37.1 million in the spring, despite having an initial asking price of around £60 million.
In Leeds, 6-7 Park Row remained on the market for two years before selling for just over £8 million last month, a significant reduction from its original asking price of about £20 million. The office market has been slow for a couple of years, primarily due to rapid interest rate rises, which have increased the cost of financing and lowered valuations. Additionally, uncertainty surrounding the future of the office in the post-pandemic world of hybrid working has contributed to the sluggish market.
While demand from businesses for “best-in-class” offices is growing, finding tenants for so-called secondary offices is becoming increasingly challenging. CoStar estimates that 8.3 percent of all office space in the UK is currently vacant, the highest level in 11 years, with the majority of this space being in older buildings on the outskirts of towns and cities. Some landlords appear willing to sell their buildings at a discount because they cannot afford the refurbishment needed to bring these offices up to the standard that tenants now demand.
Opportunistic buyers looking to improve or “flip” secondary offices must also negotiate hard to make their refurbishment projects financially viable, especially outside of London. Despite the cost of financing falling back and valuations stabilising, the market remains slow, and even “grade A” offices are proving difficult to sell. Derwent, a London office owner, marketed a building on Whitfield Street, near Euston, for £120 million this year, but the sale has since been withdrawn. Paul Williams, chief executive at Derwent, noted that while the offers made were “reasonable,” they did not meet his expectations.
As the UK office market continues to navigate the challenges posed by the pandemic, changing work patterns, and evolving tenant preferences, it remains to be seen how the sector will adapt and recover in the coming months and years.
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