UK office market sees improving sentiment and falling yields

In the first quarter of 2025, average UK office yields significantly dropped by 40 basis points to 8.2%, continuing a downward trend since peaking at 8.9% in Q3 2024. 

Office stock

According to real estate analytics company CoStar, this suggests increased investor confidence in a sector that was previously facing challenges, driven by historically low prices and improving occupier demand. Although investment volumes were down from the end of last year, investors were willing to pay higher prices (lower yields) for properties that were sold.
The gap between office yields and those of the industrial and retail sectors has narrowed. Retail yields also saw a slight decrease, while industrial yields remained stable. This yield compression was most notable outside central London, with average yields falling sharply to 8.1% after exceeding 10% last year. Prime regional cities also saw yields harden, with notable sales in Edinburgh, Brighton, and Bristol. Central London office yields also compressed, falling 50 basis points to 5.6%.
This positive shift in yields is supported by improving fundamentals.
The UK office vacancy rate saw its first marginal decrease in five years during Q1 2025, indicating more occupied space.
Remit Consulting reported a post-pandemic high for office attendance, with more companies requiring employees to be in the office multiple days a week.
Construction activity has hit a decade-low, suggesting that supply and demand are finally rebalancing after years of oversupply.
Despite the recent yield compression in the UK, UK offices remain attractive compared to the US, offering average yields 60 basis points higher despite a much lower vacancy rate. This reverses a trend from the five years before 2022, when UK yields were lower than US yields.
The potential undervaluation of UK property in recent years is drawing investor attention. Knight Frank predicts a surge of capital targeting London offices in 2025, and BlackRock CEO Larry Fink has expressed intentions to increase investment in the UK, citing undervalued assets. However, investors are expected to remain selective, favouring prime locations and opportunities, while secondary offices and those in less desirable areas may still face challenges. Global trade tensions and economic uncertainty could also temper this momentum.