Is the Sector Primed for a Comeback?
Our second report delves into the office sector. For the last few years, offices have been seen as the "outcast" of real estate markets, especially following the disruption caused by the COVID-19 pandemic. This perception is changing, particularly in Europe, where economic recovery, urban regeneration, and evolving work trends are creating new opportunities for office investment. Investors are recognising the return to office is gaining momentum and the long-term potential of office assets that are strategically located, energy-efficient, and equipped to support modern business needs. The following key factors are showing signs that the tide is indeed turning for offices.
Strengthening Demand Engines
Europe is showing growth across various metrics, including: (i) economic growth, averaging 1.4% over the next 5-years; (ii) over 8 million jobs, of which 2.6 million office-based created in the last 5 years and (iii) corporate profits projected to grow by more than 6% per year, over the next 2-years. These all point to solid demand fundamentals, which are further supported by improving levels of in-office attendance. Across our Cushman & Wakefield offices in Europe, office attendance is above 70% (2024), up from 60% two years ago. In addition to strong in-office attendance, average lease duration has also recovered to pre-pandemic levels, providing further evidence office remains critical to modern business operations.
In the past five years, occupied office space has risen in most of the European markets we track. By the end of Q1 2025, this increase represents an additional 2 million square meters of office space occupied across Europe compared to the end of Q1 2020.
Focussing in on London, which has had the slowest return to office compared to its European counterparts, here too we spot an inflection occurring. The flight quality story has been told, and it is certainly playing out in Central London as well. Net absorption represented 65% of the new Grade A completions over the last five years. As a result, the vacancy rate in Grade A space has been stable at just above 5% over 2024, below the overall vacancy rate in Central London of 9.4%.
However, the new story unfolding is that, given the lack of Grade A space options, particularly the size of requirement occupiers require, available for lease, occupiers are increasingly turning to secondary spaces to secure desirable locations. As demand spills over into secondary stock, evidenced by a 9% quarter-on-quarter increase in take-up in Q4 2024 across Europe, landlords may find opportunities to enhance assets through repositioning strategies.
Investment Outlook
Returns for prime offices across Europe are also improving. Total returns, which is the key metric for assessing property investment performance, is calculated by combining both capital and income. In recent quarters, the office sector across most of Europe has returned to positive total returns which has been driven by a combination of stable yields but more importantly the rental growth upgrades. While there is variation across markets, the improvements to the rental growth for offices—particularly in prime locations—has played a crucial role in supporting overall returns. Prime office YOY rental growth in Europe is in fact outpacing other sectors with rental growth of 4.0% in Q1 2025, surpassing the 3.5% and 3.9% increases seen in prime industrial and high street retail assets. Office prime rental growth has been very stable, ranging between 4 and 6% for the last 12 quarters. This suggests that investors should be increasingly confident in their net operating incomes proformas.
Looking ahead, our forecasts indicate there is potential for yield compression in 2025, further supporting returns. While rising 10-year bond yields could temper some of this compression, in particular for the office sector, increasing competition for high-quality assets will maintain the downward pressure on yields. As more capital is deployed into prime real estate, demand is likely to outstrip supply, reinforcing yield compression despite macroeconomic headwinds.
Core Capital Recovery
While investor sentiment in Europe continues to favour value-added strategies (47%) according to the latest INREV investor intentions survey, there has been a noticeable shift toward core strategies, (38% up from 30% a few years ago). As investors seek to balance higher-risk opportunities with more stable, income-generating assets, core strategies—focused on prime—are gaining traction once again. This shift highlights the evolving risk appetite in the market and a renewed confidence in the long-term stability and income appeal of core assets in key European markets. In addition, there has been a significant rise in core mandates, which reached €45.2 billion in February according to the C&W Capital Markets team, more than doubling since Q4 2024. This largely refers to new or increased allocations.
While the return to core remains the newest development, there continues to be strong demand for value-add office properties, with a portion of this demand focused on repositioning well-located assets with strong fundamentals. These assets are attractive as they offer the potential for significant upgrades that can drive higher returns. At the same time, there is also growing interest in acquiring Grade A office spaces at yields that offer favourable leverage opportunities. These acquisitions not only allow for positive leverage but also present the possibility of capital valorisation through yield compression in the future, as market conditions improve and rental growth continues. This combination of repositioning potential and strategic acquisition of prime assets positions value-add investors to capitalise on both short-term improvements and long-term capital appreciation in the office sector.
The Cushman & Wakefield Fair Value Index indicates that, on average, prime European offices are currently underpriced by 7.5%. For investors, this presents a compelling chance to acquire properties at attractive price points. The underpricing trend is not uniform - different markets are experiencing varying degrees of underpricing, with some cities or sectors offering even more attractive pricing relative to others. As the region's economic and real estate fundamentals continue to improve, the likelihood of these markets realigning with their true value increases, further enhancing the investment opportunity. With the current capital buildup, sellers also have a valuable opportunity to leverage market momentum, particularly if they are under pressure or seeking to diversify their capital structure. This window allows for maximising returns or strategically repositioning portfolios, offering liquidity for reinvestment in high-performing assets.
In summary, offices continue to be the leading asset class in terms of investment volume in the 12 months to Q1 2025, accounting for 20% of the overall market share, according to MSCI RCA. While this marks a decline from the cyclical peak of 40% in 2019 and a significant drop from the all-time high of 46% in 2007, investors are anticipated to shift their focus back to office investments as they recognise the long-term potential for better returns in the sector.
