Exploring the dynamics of the UK office rental market unveils a growing demand for Grade A office spaces. Let's assess the trends from 2023 and early signs for 2024.

What is Grade A office space?

A building of the highest quality is the short answer. The criteria for allocating such an accolade falls into a variety of categories including age of the building, ESG guidelines and location to name a few. Consequently, much of the Grade A office space is located the UK’s major cities.

The Now building at the Thames Valley Park in Reading is an award winning office space featuring floors of Grade A office space.

Looking back at 2023

Despite a relatively quiet start to the year, 2023 saw a rise in demand for high quality Grade A office space. With continued economic uncertainty moving into 2024, commercial landlords and developers have been and are still increasingly cautious about investing in new office construction projects across the UK. This isn't to say that investment is at a complete standstill, but demand did outweigh supply of Grade A office space in 2023.

Research by Lambert Smith Hampton, highlights how this surge in demand bumped rents to a 17 year high across the regional markets of the UK. Prime rental rates increased by an average of 5.5% in 2023, with increases in Newcastle, Sheffield and Glasgow averaging a whopping 10% over the year.

Strong Q4 to end 2023 on a high

Research by Cushman & Wakefield reveals that the preference for high quality Grade A spaces remained steadfast in 2023, amounting to a notable 70% of the total volume, surpassing the five year average of 57%. Despite economic challenges and the persistent trend towards remote work, office investment defied expectations in the second half of 2023, reaching £304 million in the Big Five and an impressive £1.2 billion in Central London during Q3 2023.

Against the backdrop of uncertainty created by high inflation and high interest rates, the final quarter of 2023 presented a compelling narrative. The Five cities - Birmingham, Bristol, Edinburgh, Leeds and Manchester - alongside Central London, experienced a 32% surge in the total take-up of Grade A office spaces. This amounted to a substantial 3.4 million square feet, marking a 6% increase from the five year quarterly average.

However, office investment is at a crossroads as we head into 2024. With the rise in flexible working and with higher rental costs, tenants are reconsidering their space needs. This trend, driven by companies downsizing and the evolution of businesses' ESG requirements, further expands the gap between prime and secondary office spaces. As a result, research by Cluttons indicated that investors are assessing the appetite among prospective tenants for Grade A office space or whether investment is best pointed towards secondary space where there opportunity for change of use is more accessible.

Is it time to refurbish?

The shortage in new Grade A stock presents an intriguing proposition for occupiers facing imminent lease events. Rather than seeking new spaces, tenants are increasingly opting for office refurbishments, viewing it as an opportunity to reassess and revitalise their current workspaces. This trend opens avenues for negotiations, potentially leading to longer leases to maximise the returns on refurbishment investments.

The refurbishment story isn't confined to tenants alone; landlords are seizing this moment to invest in capital works. Refreshing common areas, receptions and creating spaces for communal work not only elevate the building's status to premium stock but also position landlords for market leading yields in the upcoming lease cycle.