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Usually frequented by film crews shooting period dramas and greengrocers stocking up on sprouts in the middle of the night, Borough Market is currently filled with small-scale construction teams converting deserted fruit and veg wholesalers and unused railway arches into what has been dubbed "London's Larder".

The market trustees' bid to encourage high-quality food wholesalers and retailers to move to their intriguing pocket of Victorian London, tucked behind Southwark Cathedral, is beginning to pay off. The vast Vinopolis wine merchant and "entertainment complex" is due to open shortly, as is seafood restaurant Fish, a bread shop spin-off of Clerkenwell restaurant St John, as well as coffee houses, delicatessens and bakers.

Offering a taste of things to come, exclusive baker Konditor & Cook has opened a shop as tasty as its raspberry and chocolate fudge tart. Designed by Azman Owens, which designed the original bakery in Waterloo – as well as the home of its proprietor, Gerhard Jenne –the new outlet mixes cake shop with kitchens for savoury and cake products, adding generous helpings of clean lines and natural light and a dash of innovative engineering.

Squeezing kitchens and shop into just 150 m² of floor space on two long thin floors, the architect has created something modern without overplaying the "designer" element. "The main thing is that it is a production bakery, so we were really keen not to make it glitzy and trendy," explains Ferhan Azman. "It's in the middle of Borough Market, so all the fitting out revolves around the production process. If it had been a patisserie on a high street in Knightsbridge or Islington, we'd have designed it very differently."

Despite the shop's status as one of the capital's top bakeries, the interior respects the area's utilitarian past. Dark limestone counters, bright stainless steel units, soaring white walls and big plate-glass windows are all solidly functional. Where possible, the original wooden floor has been kept; and where it has been replaced, stainless steel sheets lend rugged overtones. A few quirks – a tiny glass "jewel box" inserted at the entrance for the conspicuous display of mouthwatering delights, and a basement light shaft with a carefully raked miniature garden – serve as reminders of the architect's creative mind at play, while the rest of the interior is commendably restrained.

A 4 m floor-to-ceiling height offered just enough room for the insertion of a glazed mezzanine office, but no space for additional structural support. Dense timber 65 mm thick rests inside the profile of the steel I-beams that support the office, shaving as little as possible off the head heights above and below. Hanging over the back of the shop, it creates another dimension to a space that might have been overly long and thin. An open cube, fully glazed at the front and half open at the back, it also allows the manager to keep an eye on the service area at the front and the savoury kitchen behind. Ventilation is provided by a subtle vertical slit running parallel with the side of the box and extra daylight brought in through the skylight over the rear kitchen.

One of proprietor Jenne's stipulations was that the basement kitchen, used for Konditor & Cook's primary trade of cakes and biscuits, should receive as much natural light as possible, allowing the staff some connection with the outside world. Although the scope for this was limited, Azman Owens came up with the novel idea of using the existing fruit and veg hatch at the front of the shop as a lightwell, constructing a glazed shaft down into the basement with a miniature Zen garden at the bottom. It also links retail and production by allowing customers to see the kitchens.

In addition, glass-studded concrete paving lights on the floor of the savoury kitchen allow light to filter down from the rooflight above into the rear of the basement, a cost-effective solution where more extensive floor glazing would have been too expensive for the £180 000 construction budget. The effect is augmented by daylight bulbs, so the basement feels surprisingly light.

Before these details had been worked out, the project hit one major snag: the building control officer's decision to classify the building as a factory. This meant it needed a second entrance, which put even more pressure on the narrow shop. A separate goods entrance was created to the side of the space, its narrow corridor hugging the line of the neighbouring building so as not to impinge on the shop. Where it turns a slight corner, a long glazed slit has been inserted to create a visual link to the shop counter.

Opening up in time for Borough Market's food festival last November, this stylish but sensitive conversion has set the standard for the regeneration of the whole market area.