Across much of the market, yields on good-quality offices have reset to levels last seen during the Global Financial Crisis. In many cases, capital values now sit below replacement cost. At the same time, vacancy is falling and rents are rising in major UK cities. This disconnect between pricing and fundamentals suggests the sector is being driven more by narrative than by operating reality.

This narrative is simple. Hybrid working has permanently reduced demand for office space. ESG requirements are prohibitively expensive, leaving only a narrow band of fully decarbonised “trophy” assets investable. Liquidity is structurally impaired, particularly outside London. Layer onto this the fear that artificial intelligence will materially reduce white-collar employment, and it is easy to see why investors remain cautious.

Current market conditions have amplified these concerns. The UK fund management industry is consolidating, defined-benefit pension schemes are gradually exiting illiquid assets, and smaller funds have faced redemption pressure. These groups were historically core buyers of regional offices. Their retreat has pushed yields sharply higher across all but the most favoured assets, creating historically wide discounts between “trophy” buildings and everything else.

But take a look at the underlying fundamentals - they tell a different story. Hybrid working has changed attendance patterns, but it has not eliminated the need for offices. Occupiers now attend fewer days per week on average, but space requirements are determined by peak-day usage, not averages. With attendance clustering mid-week and continued demand for collaboration, meeting space and client areas, most occupiers still require close to pre-Covid levels of space. This is borne out by the data: vacancy is falling and prime rents are rising in both London and key regional cities.

On the supply side, development activity, particularly outside London, has collapsed. Higher financing costs, elevated construction prices and exit yields that no longer support viable development have brought new supply to a near standstill. In office markets, rents typically begin to rise as vacancy starts to fall, not when vacancy is already tight. The current combination of falling vacancy and a constrained pipeline supports re-letting prospects and underpins future exit liquidity.

ESG considerations, while critical, are often oversimplified. A small subset of buildings is genuinely obsolete, but most offices sit in a broad middle ground where decarbonisation can be phased, costed and managed over time. When these costs are properly underwritten, ESG becomes a solvable capital programme rather than an existential threat - and one that can materially improve liquidity at exit.

The impact of AI on office demand is also frequently overstated. While automation will affect certain tasks, there is little evidence so far of widespread job destruction. Early indications point to productivity gains rather than wholesale reductions in employment, reinforcing demand for offices that support higher-value, collaborative work.

The most attractive opportunities today lie just below the top tier: modern, well-located CBD offices with good fundamentals and a clear, deliverable improvement and decarbonisation pathway. At current entry yields, income does much of the work, and returns do not rely on heroic assumptions around rental growth or yield compression.

UK offices are being priced by fear rather than cashflow. For investors prepared to engage with the realities of occupier demand, supply constraints and ESG execution, this looks less like a structural decline and more like a compelling cyclical mispricing.