Rents are rising, development pipelines are shrinking and new sources of capital are beginning to emerge. After two years of repricing, the office sector may finally be approaching the point where sentiment catches up with the fundamentals.
Every year at MIPIM, whatever the weather, one sector has its day in the sun. Last year it was arguably retail; the year before that, logistics. My bet is that 2026 will belong to the office sector.
Occupational markets have been improving for nearly two years, with rental growth spreading beyond central London into the Thames Valley and the major regional cities. At the same time, development pipelines have slowed and remain far below the levels seen before higher construction and financing costs began to bite. In turn, the supply of modern space is tightening. Capital markets, however, have yet to catch up. Office values repriced rapidly as interest rates rose, leaving a disconnect between stronger income fundamentals and depressed asset prices. For investors willing to commit early, that gap is beginning to create opportunities across multiple strategies – from prime assets benefiting from rental growth to higher yielding income strategies further along the risk curve.
Tightening supply
For prime offices, much of the focus still centres on central London, where pricing, liquidity and global capital tend to set the tone. Yet some of the most interesting shifts in fundamentals are taking place outside the capital.
In Bristol, prime office rents have reached £50 per sq ft, with interest pushing into the mid £50s, while in Reading, prime office rents have already achieved £56 per sq ft. Meanwhile Birmingham, where Eversheds recently committed while their existing lease still has over two years to run, hit £52 per sq ft, reflecting the chronic shortage of high quality buildings in the city.
Investment pricing in many markets still reflects a degree of caution, which presents opportunities that can be at least as attractive as those available in London on a risk adjusted basis. In practice, however, the challenge is often scale. Large institutional investors require substantial lot sizes, which remain relatively scarce in many regional markets. Still, the reported £300 million sale of part of Birmingham’s Paradise development illustrates the opportunity. The long-leasehold scheme with a 12 year weighted average unexpired lease term is understood to be trading at an attractive yield of around 7.5%, according to Green Street News.
Dedicated allocations
What truly sets the office market apart today is the range of opportunities available to investors across the risk curve. The relative absence of core money, particularly from DB pension schemes, has been well documented, and the uncertain economic backdrop means significant barriers to entry remain across the investment spectrum. Nevertheless, with more office buildings being brought to market, 2026 may be the year core institutional capital begins to return at scale.
Local Government Pension Schemes (LGPS) are being consolidated into a handful of large pools. Many of these vehicles now exceed £1.5bn and are beginning to return to the market with dedicated real estate allocations. Their mandate closely resembles the traditional DB core investor – long term, diversified exposure across sectors and across the country.
Similarly, overseas institutional capital is beginning to widen its focus. Aware Super, for example, has been a prominent buyer of UK and European real estate since opening a London office two years ago. Through its partnership with Delancey, the fund has said it is targeting prime London offices alongside "other high quality, undervalued opportunities in the UK." Other long duration investors are also circling the sector, including US net lease buyers such as Blue Owl and Middle Eastern institutions attracted by the prospect of positive leverage and strong cash on cash returns.
Crucially, these investors are the group that tends to set pricing in regional office markets. By targeting prime assets with secure income, they establish the benchmark yields that developers, lenders and more opportunistic buyers underwrite against. As this capital begins to deploy in size, the effects ripple through the market: prime regional yields begin to firm, transaction volumes increase as institutions position their portfolios with best-in-class product, and developers gain clearer exit pricing for new schemes. The sale of 3 Chamberlain Square, Birmingham quoting 6.5% NIY – arguably the best building currently available outside London – will be a bellwether transaction for the market. This level compares favourably with prime yields in the City of London, which stand in the region of 5.25% and 4.00-4.25% NIY in the West End.
Double digits
The repricing of the past two years, combined with the temporary absence of core capital, has left some assets trading at entry yields that were rarely seen in previous cycles. Increasing numbers of investors are acquiring buildings to hold purely as income producing assets rather than pursuing costly redevelopment.
Starting yields are frequently in the double digits, generating substantial cashflow even before any operational improvements are made. In many cases the strategy is deliberately defensive: focus on managing voids, undertake only essential refurbishment and hold the asset for income rather than betting on aggressive rental growth or a rapid market re rating. With limited speculative development and debt costs now closer to 5.5%, modest leverage can also enhance cash on cash returns. Martley Capital is at the vanguard with its recent acquisition of three modern offices in Newcastle, Liverpool and Chester for £40m, reflecting a 13.4% NIY.
Perhaps the clearest signal that the UK office market may be approaching an inflection point is the growing number of owner occupiers buying their own buildings. For companies with long planning horizons, the repricing of the past two years has created a rare opportunity to lock in occupation costs at historically attractive levels. National Air Traffic Services recently purchased its headquarters at Solent Business Park for around £37.5m, while BNY Mellon and Lloyds Bank have bought in their offices in Manchester and Bristol, respectively.
With occupational markets strengthening, core capital beginning to stir and new buyers emerging across the risk spectrum, the office market is entering the next phase of its cycle. If MIPIM is a barometer of investor sentiment, we expect this year’s gathering in Cannes to mark the moment when sentiment finally catches up with the fundamentals.
This article first appeared in Green Street News.
