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Demand for premium space pushing up prime rents

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Vacancy rates falling in areas like central London

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Office investment lagging, out-of-town properties still

struggle

By Iain Withers

LONDON, June 13 (Reuters) - Demand for premium office

space in cities like London and Paris is heating up as more

companies order staff back to the office, but investment is

lagging and could worsen a supply crunch, property sources said.

Many businesses are rolling out stricter return-to-office

mandates, including JPMorgan, Amazon and Royal Bank of Canada.

Others like UBS and Deutsche Bank have told staff not to work

both Fridays and Mondays from home.

The trend is reflected in falling vacancy rates and record

office rents in prime locations such as central London.

Yet investors remain reluctant to buy properties or commit

to building new ones due to uncertain pricing and high borrowing

costs.

"The pendulum has swung... We've got pent up demand, and

then we've got a shorter level of supply, particularly quality

supply," said Lee Elliott at property agency Knight Frank.

The office vacancy rate in central London fell to 7.1% in

March, according to agency Savills, down from a post-pandemic

peak of 8.7% and the lowest since 2020, but higher than the

roughly 5% level in pre-pandemic 2019.

Average prime rents in the central City and West End

districts were at near-record levels in March, Savills data

shows.

However, the picture is less rosy outside the centre. The

vacancy rate across London as a whole rose to 10.9% in the first

quarter, according to CoStar data, the highest in more than 20

years, as occupiers shunned older, out-of-town properties.

The mixed picture is weighing on investment. Office sales in

Europe last year slumped to their lowest level since 2009, while

transactions fell 18% year-on-year in the first quarter,

according to MSCI data.

In London, only about 4 million square feet of new office

space is planned to complete in 2027 and 2028 - less than was

delivered in 2025 alone, according to Deloitte.

Planned London office sales by Brookfield and Nuveen

were shelved this year after bids fell short of expectations,

although there are signs of improved appetite for some trophy

assets - Blackstone is among bidders for a Paris office

block with a price tag of 700 million euros ($812 million).

Some companies are also cooling on the downsizing trend,

with just 21% of occupiers looking to cut space in a recent

Knight Frank survey - the lowest level in seven years.

HSBC ( HSBC ) is moving its headquarters in London to a building

roughly half the size, but has realised it will lack sufficient

space and is assessing other options including retaining smaller

offices elsewhere in London, a source familiar said.

An HSBC ( HSBC ) spokesperson declined to comment on its options.

With limited new supply, improving demand could ultimately

benefit second-hand office space.

Around 30 large companies are each looking to lease more

than 100,000 square feet of office space in London - equivalent

in total to at least 40 soccer pitches - according to Kevin

Darvishi, leasing director at office developer Stanhope.

"Frankly there will not be enough space...for even half

those occupiers to move," he said.

($1 = 0.8624 euros)