The Flight to Quality in London Office Space

Flight to Quality – A New Chapter in London’s Office Market

London’s office market in 2025 is undergoing a transformative phase defined by a pronounced “flight to quality“. Originally a term from financial markets—describing the shift from riskier to safer assets during turbulent times—it now aptly captures the movement away from lower-quality, underperforming properties toward premium assets that offer long-term stability and enduring value.

Amid persistent uncertainty and a 20‐year high vacancy rate of 10.6% (up from around 5% at the pandemic’s onset), both tenants and landlords are gravitating toward the safest, best-equipped assets. In addition to the challenges brought about by remote and hybrid work models, the sector is under increasing pressure from sustainability mandates. Ambitious net zero targets for 2050, stringent Energy Performance Certificate (EPC) requirements, and an elevated focus on environmentally sustainable practices are compelling property owners to upgrade their portfolios—further accelerating the flight to quality.

Market Overview: Vacancy, Leasing and Rent Trends

Recent data reveals a polarised market: while prime Grade A (or 4 & 5 Star) office spaces in key submarkets such as the City and West End have experienced robust leasing activity—with vacancy rates in these segments dropping to seven-year lows and record rents reaching up to £122 per sq ft in November—the broader market is challenged by a surge in new supply. With approximately 16.2 million sq ft currently under construction, overall vacancies remain elevated even as best-in-class properties continue to attract premium interest.

According to the latest CoStar data, London’s overall office inventory stands at approximately 422 million sq ft with a vacancy rate of 10.6%. While rising vacancies and a broader array of tenant options exert downward pressure on overall rents, high-quality properties continue to command stronger rates due to their proven performance and desirable attributes.

Why is the Demand Growing for Grade A Office Space?

At the heart of the flight to quality is a surge in demand for Grade A office space. These properties—whether newly built or extensively refurbished—boast cutting-edge design, flexible floor plans, advanced IT and HVAC systems, and abundant natural light. They frequently secure top-tier green certifications (such as BREEAM, LEED, or WELL), meeting rising ESG standards and often benefiting from more favourable financing conditions.

Tenants, prioritising both quality and safety, are willing to pay a premium for such spaces, which act as safe havens even in a broadly challenging market. Key qualities driving demand include:

• Design Excellence: Contemporary aesthetics and adaptable layouts tailored to modern work needs.
• Technological Integration: Smart workplace technologies that enhance operational efficiency and employee comfort.
• Sustainability & ESG: Superior green ratings that reduce risk and appeal to eco-conscious stakeholders.
• Location & Amenities: Prime settings in vibrant, low-vacancy areas with premium features like roof terraces.

What is Causing the Flight to Quality?

The flight to quality is driven by several interrelated factors. Below are some of the key drivers:

1. Hybrid Working, Downsizing and Rightsizing:

   With approximately 44% of UK employees working from home or in hybrid arrangements, companies are re-evaluating their space requirements. This shift prompts organisations to downsize overall square footage while prioritising modern, flexible environments that foster collaboration and innovation. In essence, businesses are seeking smaller yet higher-quality spaces that align with evolving work practices.

2. Search for Safety and Investor Sentiment:

   Mirroring shifts in financial markets—from riskier equities to stable blue-chip stocks—investors and tenants are increasingly prioritising high-quality properties to mitigate potential risks. Economic uncertainty and stricter lending standards further reinforce the need to focus on assets that promise reliability and lower exposure to market shocks.

3. ESG Mandates and Regulatory Pressures:

   Governments and local authorities are intensifying efforts to achieve net zero targets and improve energy efficiency. New regulations require buildings to secure stringent EPC ratings (A or B) by 2030. Consequently, landlords must invest in upgrades such as high-spec LED lighting, electric heat pumps, improved insulation, and other sustainable technologies. These investments favour modern, energy-efficient assets and compel the market to shift toward quality properties that can meet these rigorous standards.

4. Market Cycles and Value-Add Opportunities:

   The current market cycle is characterised by subdued demand combined with an influx of new supply, which has widened the price gap between top-tier and lower-quality properties. This dynamic not only challenges owners of older, underperforming assets but also presents attractive opportunities for value-add investors. By targeting these assets for refurbishment or conversion, investors can reposition them to meet contemporary market expectations, capitalising on the ongoing shift toward quality.

What are the impacts for Landlords and Tenants?

For landlords, portfolios concentrated in premium assets now yield lower vacancies, stronger lease terms, and enhanced flexibility to reinvest in property upgrades. In contrast, owners of older, lower-quality stock face mounting pressure to offer significant concessions or repurpose their assets to remain competitive.

For tenants, the decision to commit to premium office space involves balancing higher costs against benefits such as enhanced employee satisfaction, improved brand image, and long-term security in well-located, high-quality buildings. Many companies are adopting “core plus flex” strategies that combine a flagship presence with cost-efficient, flexible workspace solutions.

Is Flight to Quality the Best Way to Describe the Office Market?

Although the term “flight to quality” has been widely adopted to explain current office leasing trends, a closer look reveals that this label may oversimplify an increasingly nuanced market. Critics argue that while premium properties have shown relative resilience, the broader trends suggest that the story is more complex:

• Narrowing Leasing Volume in Top-Tier Buildings: Contrary to what one might expect in a true “flight to quality,” the share of new leasing activity in five‐star properties has actually declined. In 2019, over 10% of leasing occurred in these buildings, but by 2023 this share dropped to less than 8%, with leasing activity also contracting in the adjacent four‐star category.
• Shrinking Lease Sizes: The highest quality buildings have seen an average reduction of 43% in lease space compared to pre-pandemic figures. This significant contraction in lease sizes suggests that even though tenants are still seeking premium assets, the absolute volume of high-quality space being absorbed is much lower than before.
• Age Over Star Ratings: Data indicates that occupancy losses are not confined to lower-quality buildings. Even older five‐star properties have struggled, whereas newer constructions across all quality ratings have maintained robust demand. This points to a trend where the recency of a building’s construction, with its modern amenities and design, may be as critical as—or even more important than—the traditional star rating.

These objections suggest that while quality remains important, the market is also rewarding properties that are new, adaptable, and technologically advanced, regardless of their legacy rating. Rather than a straightforward “flight” to quality, the trend may be better described as a shift toward modernity and operational efficiency in office environments. This more detailed perspective shows the need to assess office assets by a broader range of criteria, capturing the evolving priorities of today’s tenants and investors.

Does the Flight to Quality have a Future?

Looking ahead, flight to quality is expected to persist as market uncertainty continues. A critical factor shaping this future is the increasing emphasis on energy performance and sustainability. Buildings are likely to be required to achieve higher EPC ratings and meet increasingly stringent net zero targets by 2050. With growing awareness of embodied carbon in construction and refurbishment, investors are demanding properties that not only reduce operational carbon emissions but also minimises embodied carbon.

As owners upgrade their portfolios to meet these sustainability criteria, improved EPC ratings are becoming a key indicator of asset quality. This shift is not solely about reducing environmental impact—it is also about enhancing property value and resilience against evolving regulatory standards. Investment in ESG measures, including energy efficiency upgrades, renewable energy integration, and reductions in embodied carbon, is becoming integral to maintaining competitiveness.

In essence, while market uncertainties persist, the ongoing focus on higher EPC ratings, net zero ambitions, and reduced embodied carbon highlights a sustainable future for London’s office market in the long run.