Director of Lismore, Colin Finlayson, explained: “Despite limited supply and challenging conditions for new development, strong demand exists for high-quality office space, which creates opportunities for investors to underwrite rental growth. Yield levels are currently comparable to their long-term averages, making them attractive to long-term investors.

“Across Scotland, city centre offices show the greatest occupier demand, with potential for refurbishment/repositioning. To stay relevant in the market, retain existing tenants and achieve rental growth, owners of existing assets must invest in improving their ESG credentials and amenities.

“These improvements are also necessary to maintain liquidity in the investment market.”

Andy McKinlay, chair of Ediston Real Estate, shares a similar view. He added: “In the city office markets, supply and demand dynamics are key, in order to achieve investor expectations and development success. The market will become more polarised, leading to a more pronounced pricing differential.

“Prime, well-let, new builds with modern occupier-led space and strong sustainability credentials will continue to attract occupiers and trade well.

“Peripheral buildings can work, but only if repurposed to meet the necessary ESG and wellness credentials, whilst secondary office values need to fall further to reflect post-pandemic demand and capex. Buildings delivered over five years ago are overpriced and lack the necessary ESG credentials.”

Lismore’s research found that 56% of investors do not anticipate increased transaction volumes in the prime office sector during 2023, with concerns about the quantity and quality of stock being brought to the market and the gap between vendor and buyer pricing aspirations. However, investment managers are more optimistic, with 56% expecting volumes to increase. A majority of respondents (83%) believe that values have not fallen sufficiently for added-value office space and need further reductions before revising the sector.

The consensus among respondents is that hybrid working is a structural change that will remain, with 56% expecting it to persist and 37% anticipating an increase in remote work at least part of the week over the next year. Businesses are responding by consolidating their office footprints and improving office environments.

Across the three major Scottish cities — Edinburgh, Glasgow, and Aberdeen — distinct occupational demand drivers and investor sentiments emerge.

Edinburgh benefits from low supply, broad-based occupier demand, and active investor sentiment, while Glasgow faces widening yield gaps and a shallower investor pool. Aberdeen shows signs of improvement, but investment levels remain low, with opportunistic and income-focused buyers finding yield compensation in recent transactions.