Office-based employment will fall in 2023 and this will constrain leasing activity across the UK, but the outlook for the best quality space remains positive. Increasing interest rates has caused pricing uncertainty, and this will create a more challenging environment for the investment market in the first half of the year.

Key Takeaways

  1. Falling office-based employment and a recessionary environment will constrain growth in the office leasing market. Take-up of office space in the UK will be lower in 2023 than it was in 2022.
  2. A large proportion of the office space under construction or undergoing refurbishment due for completion in 2023, has already been pre-let. Continued strong demand for the best quality space will cause demand for development or refurbishment to remain high, despite overall levels of demand falling.
  3. Poorer quality, or poorly located office space, will underperform in 2023. Buildings that do not match the environmental goals of large occupiers will be the most difficult to let and are likely to experience long void periods.
  4. Having already seen outward movement in 2022, it is expected that yields will expand further during the first half of 2023 in most UK office markets.
  5. Pricing will stabilise during 2023 and this should stimulate more investment activity. Office investment volumes are expected to be 20% down year-on-year in 2023, with the majority of transactions focused in the second half of the year.

Following a large increase in 2022, office-based employment will fall in 2023

A slowdown in the UK economy will adversely impact demand for office space. Office based employment in the UK tracked by CBRE is expected to fall by c.1% in 2023. The fall in office jobs will impact all markets, however the forecast decline is more muted in Central London than other markets.

As a result of falling employment numbers, take-up across the UK office markets in 2023 is expected to see a decline of 7%, relative to the 2022 levels, marginally lower than trend levels.

A strong pipeline of space will be well received by the market

We are tracking 10.9m sq ft of office development or refurbishment space under construction with an earliest possible completion date during 2023 across the UK office markets. This would represent an increase from the estimated full-year 2022 total of 7.9m sq ft. However, delays to completions are expected and could significantly reduce the total.

Although take-up is expected to be below-trend in 2023, demand for the best quality space will remain robust. Of the space under construction and due for completion in 2023, 35% has already been pre-let, and the anticipated high levels of demand for development space will deplete the pipeline further as the year progresses.

Figure 8: UK office-based employment growth forecasts

Source: CBRE Research/ONS. Covers big six office markets plus Central London and South East

Figure 9: Central London secondhand vacancy, time on market, size-weighted average

Source: CBRE Research

Secondhand space will underperform in 2023

The slowdown in leasing activity will be most notably felt in the secondhand office market, especially if the space is poorly located, or of poor quality. Average void periods for secondhand space will increase in 2023. For example, it is likely that secondhand void periods will reach 1,000 days in Central London by the end of the year (Q3 2022 average void period for secondhand space was 850 days).

2023 will see a drop in investment volumes: prime yields have increased with rising interest rates

Most UK office markets have seen outward movement in prime yields so far in 2022, ranging from +15-50 bps. At the end of Q3 2022, prime office yields stood at 3.5% in London’s West End (core markets of Mayfair & St James’s), following outward movement (+25 bps) during Q3 2022. The UK prime yield remained higher than its equivalent in several key EMEA markets, such as Paris (3.15%), Berlin (2.90%), and Madrid (3.25%).

Outward yield movement of up to 100 bps in some UK office markets is forecast for the final quarter of 2022. The Mayfair & St James’s prime yield is expected to end the year at 3.75% (+25 bps quarter-on-quarter). Yields are expected to increase in 2023, with prime yield compression resuming across UK office markets from 2024-2027. Overall, prime yields are expected to move out from their end of 2022 levels in most UK office markets.

Market uncertainty could limit investment volumes

Equity targeting London offices has fallen below trend levels to £33bn, down £3bn from the level recorded in H1 2022. Despite having the capital available, not all investors will transact in the current market – we estimate approximately 30% of equity interested in London would transact in current market conditions.

Volumes in 2023 to £16.2bn, of which £10.5bn is expected in the Central London market. Volumes are likely to be more constrained in H1 2023, with a recovery expected in the second half of the year.

Figure 10: Equity targeting London (£bn)

Source: CBRE Research

Related Service

  • Use the world’s most comprehensive real estate services platform to find solutions for your needs as a corporate occupier or office investor.