The London office market has undergone a period of considerable change in the post-pandemic period. Some of these changes were expected, while others were not so well anticipated – including the record high rents that are now present in all-bar-two of the London submarkets. Rents are evidently not easy to predict. However, with their parameters set out by government, business rates are – and they’re going up. The impending 2026 business rates revaluation is set to push occupiers up another step on the occupational costs escalator they have been climbing for the last five years. The latest data from Cushman & Wakefield’s 'London Moves 2025' report reveals how companies have been navigating these pricing pressures in recent years – but how might the landscape change in the future?
Sustained High Leasing Activity for Core and Grade A
In 2024, London saw 531 office moves, only slightly below the record-breaking levels of 2023. This sustained activity underscores the ongoing demand for office space in the city. A notable trend is the growing need for Grade A office space, driven by businesses' focus on talent retention, collaboration, and identity in the wake of the Covid pandemic. Reflecting this shift, 65% of the office space leased in London last year was of Grade A quality. The demand for this type of space is outpacing supply, particularly in central locations putting upward pressure on rents. The City Core and Mayfair & St James’s for example have experienced rents rising by 12% and 9%.
Furthermore, in contrast to the ‘less but better’ narrative that has been assumed since the Covid pandemic, occupiers actually increased their floorspace in the London by an average of 38% in 2024, the highest figure since 2018, resulting in a net market growth of 3.27 million sq ft.
Could Business Rates Tip the Balance?
The sizable increase in business rates liabilities office movers also take on is less discussed, but is a rising concern amongst occupiers. Comparing the rates liabilities of 2024 established occupier relocators, it was found that 88 out of 156 saw their rates liabilities increase from their former to new offices, with an average rise of 33%. This increase can be attributed to the difference in size between the new and former offices, contributing to higher rates liabilities and new offices tending to be of better quality, generally resulting in higher rateable values.
The 2026 revaluation is expected to result in considerably higher rates liabilities for office occupiers across the UK, particularly in prime city centre markets. New rateable values will be based on rents as of 1 April 2024, instead of 1 April 2021. Over this period, prime headline rents have risen by 35% and 46% in the City and West End, respectively. While the exact ratable values and multipliers are yet to be confirmed by government, Cushman & Wakefield's modelling suggests that the 2026 revaluation will see overall rate liabilities increase by a further 35% to 47% on top of the increase already seen in 2024. This means that 2024 office movers will be liable for 68% to 80% more in business rates in 2026 compared to 2023.
Let’s Not Forget Rising Fit Out Costs…
Adding to the financial burden, Cushman & Wakefield’s 'Fit Out Cost Guide' now budgets £208 psf for a mid-tier specification, and up to £310 psf for a high spec finish, making Central London fit out costs the highest in Europe. These upfront costs are significant and add to the overall expense of office moves.
Location vs Quality
The implications of rising rates - within the context of increasing occupational costs more broadly – will ripple across the London market. Some prospective office occupiers may have to reconsider their location or the quality of their new office space. The 'focus on the core' theme prevalent in 2024 suggests that occupiers may prefer to compromise on the quality of their workspace to remain in central core locations. However, the improved relative value of less central locations versus the core could see a greater number of occupiers relocate to these submarkets. This could lead to a greater differentiation in location amongst occupiers, with more price-conscious, less location-sensitive companies moving further out while more profitable, locationally loyal firms remain in the centre.
In conclusion, the burden of rising rates on already high office costs presents significant challenges for London office occupiers. Businesses must navigate these pressures carefully, balancing the need for high-quality office space with the financial realities of increasing rates and fit out costs. Forward planning and strategic decision-making – particularly in the run up to the autumn budget when further clarity on business rates is expected from government - will be crucial in managing these challenges.
