London office vacancy hit 11.2% in Q1 2026. Read that in isolation and you might think the market is struggling. You'd be wrong. And right. Simultaneously. The headline number is hiding two completely different markets operating in the same city.
Grade A offices in prime locations: 4.2% vacancy. Grade B and C offices everywhere else: 18.1%. That's not a market correction. That's a market bifurcation — and it's accelerating.
The Flight to Quality in Numbers
Tenants aren't leaving London. They're upgrading. The total square footage under lease hasn't changed dramatically. What's changed is where it is. New lettings in 2025-26 show 72% of take-up going to Grade A space, up from 58% in 2022. Companies are trading square footage for quality — taking less space in better buildings.
The reasons are structural, not cyclical:
- ESG mandates — corporate tenants need buildings that help them hit Scope 3 emissions targets. Grade B buildings with poor EPC ratings actively work against those targets.
- Talent competition — in a hybrid work world, the office needs to be worth commuting to. A 1990s fit-out with strip lighting and ceiling tiles doesn't cut it when the alternative is working from home.
- Investor pressure — RICS now links commercial valuations directly to EPC ratings. Institutional investors are avoiding Grade B exposure because valuations are declining.
What's Happening to Grade B
Grade B buildings in secondary locations face a structural problem. The cost of upgrading to Grade A specification typically exceeds the building's current value. You can't economically retrofit a 1980s office block to meet 2026 ESG and wellness standards. The maths doesn't work.
Some are being converted — residential, student accommodation, last-mile logistics. Others are being demolished and rebuilt. But many are simply sitting empty, gradually deteriorating, their owners unable to let them and unwilling to invest the capital required to make them competitive.
The Pricing Divergence
Prime City rents: £75-85 per square foot and rising. Secondary Grade B: £30-40 per square foot and falling. That gap hasn't been this wide since records began. And unlike previous cycles, there's no sign of convergence. The structural drivers — ESG, hybrid work, valuation methodology — are permanent, not cyclical.
For investors, this is a clear signal: Grade A in the right locations is supply-constrained and premium-priced. Grade B is oversupplied and discounting. The middle ground — decent buildings in good locations that could be upgraded — is where the opportunity lives, but only for owners willing to invest.
Frequently Asked Questions
Will Grade B vacancy rates come down?
Not without significant capital investment. The drivers of flight to quality are structural. Buildings that don't upgrade to meet ESG, wellness, and workplace experience standards will see vacancy continue to rise. Some will exit the office market entirely through conversion.
What EPC rating do Grade A offices need?
Most new Grade A lettings in London require a minimum EPC B, with an increasing number targeting EPC A. After April 2027, the legal minimum for commercial lettings rises to EPC C. Buildings below this can't be legally let.
Is this happening outside London too?
Yes — Birmingham, Manchester, Leeds, and Edinburgh are all seeing similar bifurcation, though at smaller scale. The flight to quality is a national trend, not a London phenomenon.
Until next time — keep your buildings smart and your compliance tighter.
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