From Boardrooms to Bedrooms and Desks to Doctors: Reframing the Value of Offices

As we reflect on the UK office market over the past year, it’s clear that the story of the UK office market has split into two distinct narratives which will continue to shape the industry in 2025. Last year, the market saw prime A-grade offices in London and key regional cities thrive, buoyed by rising occupier demand and the race to meet modern sustainability and design standards. In stark contrast, ageing offices in the Grade B class were slipping into obsolescence with little interest in upgrading them.

The result was a market with no spectrum, no middle ground between the Greenest and Newest and the Greyest and Oldest. For landlords of these older properties, it’s not all doom and gloom. As we look ahead to this year, there is continued opportunity to reimagine these spaces for entirely new uses. Through repurposing for high-demand sectors like Build-to-Rent (BTR), purpose-built student accommodation (PBSA), and even senior living, there’s a promising path forward for those willing to embrace the transformation.

2024 Recap: The growing divide between Grade A and Grade B

The contrast between the thriving demand for Grade A offices and older, less flexible Grade B buildings became more pronounced last year. The divide has been starkly evident with the office market having collapsed during the pandemic unlike anything seen before. However, as pricing bottomed out, activity in the Grade A market is rebounding strongly. The pandemic reinforced the importance of the office as a concept, but it also raised the bar: occupiers have now demanded the best quality and green credentials, viewing these as essential for staff retention and attraction.

The “Big 6” cities such as London, Bristol, and Manchester have led the charge in recovering occupier activity, with Grade A offices accounting for 80% of total take-up last year. Not only that, but they’ve also seen prime rents soar in the last five years. It took nearly 20 years for average prime rents to rise from £20 – £30 per sq. ft. By contrast, the climb from £30 to over £40 per sq. ft occurred in just five years, reaching this milestone in 2023. Markets such as Bristol have already achieved rents of £50 per sq. ft, while Oxford and Cambridge have seen deals exceeding £60 per sq. ft in the past year.

Figure 1. Prime regional Big 6 office rents

The divide is not just between Grade A and Grade B but also between the Big 6 cities and regional offices. Whereas the “hub-and-spoke" model has largely fallen flat, with many regional offices now destined for obsolescence, these strides of confidence to Grade A in the Big 6 are, in DTRE’s view, something to follow suit sooner than later. These offices have hit the trough of the latest cycle, signalling the time for decisive investor action.

Grade B’s descent under(middle)ground

On the other end of the spectrum, Grade B buildings have faced a different investor landscape, having been hit hard by rapidly transforming sustainability standards and tenant expectations. Minimum Energy Efficiency Standards (MEES) regulations were updated and now require commercial properties to hit a C rating on their EPC by 2028, and B rating by 2030.

A-grade offices remain relatively unharmed by this, while Grade B buildings are struggling to keep pace. The trends of last year suggest older builds might head down a path to obsolescence as they face a more unstable market, with occupiers demanding greater sustainability and flexibility. Owners remain willing to refinance Grade A assets driven by confidence in their future value, but the same cannot be said for Grade B properties. The uncertain future of these ageing assets deters reinvestment, which will leave them increasingly sidelined in the year ahead.

Thinking outside the desk cubicle

But there’s an upside to this downturn, and this has been found in repurposing obsolete office spaces for high-demand, resilient sectors BTR, senior living and PBSA. As we head into 2025, these conversions are likely to remain a key trend as many landlords are expected to explore how Grade B offices can be transformed into vibrant properties.

These conversions, which don’t have uniquely specific infrastructure requirements, are among the most feasible options for repurposing office properties. The approach also aligns with Local Authorities' growing preference for a ‘retrofit first’ model to prioritise sustainability, and with the UK government’s housing strategy, with regulations that further eased repurposing last year.

Repositioning offers a cost-effective, adaptable strategy for transforming outdated offices into valuable assets again. In fact, ourselves at DTRE are involved with landlords in markets like Oxford and Cambridge who are exploring residential or student housing office conversions.

This won’t work for every Grade B and below office in every location but, for many, it will provide a valuable alternative to sitting, waiting and hoping on a dramatic up-turn in the UK’s office market at large.

Senior living is a sector that is often overlooked but holds significant potential for office landlords to explore. Leading doctors have repeatedly warned that our ageing population represents one of society’s greatest challenges, but it also offers investors one of their greatest opportunities. With the number of people aged 80 and over projected to rise by 71.5% by 2042, demand for well-located and well-equipped senior living facilities is expected to soar. That Grade B office may look grey and old, but it could hold untapped potential worth its weight in gold.

New value in outdated assets

The UK office market has reached an inflection point. Looking to 2025, the focus on sustainability may continue to attract major investment for A-grade, glistening offices in the premium pockets of London, while secondary offices are still caught in a market slump, proving difficult to sell. The absence of a middle ground in demand for non-Grade A have prompted a necessary evolution. This is further reflected in rent incentives for new office lettings. Best in class office rental incentives have remained constant, with net effective rents sitting at 85% - 90% of the headline rent whilst Grade B accommodation is sitting at 70% - 80%. This further demonstrates the polarisation of the market.

Repurposing obsolete offices into high-demand sectors allows landlords and investors to stay one step ahead: aligning with sustainability goals and meeting the needs of a shifting population – both routes to capitalising on long-term value. Embracing these conversions can revitalise properties that might otherwise be written off, extending asset lifespans and repositioning those landlords – currently on the backfoot – at the forefront of real estate’s evolving landscape. The trends of 2024, including adaptability, sustainability and the potential for repurposing obsolete assets, will continue to shape success in the year ahead.