- New office construction in central London down 50% in six months
- Significant delays in completions mean the volume under construction remains high – 15.1 million sq ft
- Four in five developers see the weak leasing market as the biggest challenge
- 40% of new construction is pre-let, signalling less speculative development
The construction of new offices in central London has declined by half (50%) in six months, according to Deloitte Real Estate’s latest London Office Crane Survey, published today. The crane survey analysed office construction data over the six months to 30 September, and included a poll of London’s biggest developers conducted at the end of September.
Siobhan Godley, partner and head of Deloitte Real Estate, said: “As a bellwether of developer sentiment and future office supply in the capital, this crane survey shows a decline in new construction starts to just 2.6 million sq ft across central London. This is down significantly on our previous survey, but remains broadly in line with the survey’s long-term average. Notably, a higher than average 40% of new construction starts have already been pre-let, indicating less speculative construction.”
Delays and demand
The total office space under construction in central London is now 15.1 million sq ft. This is similar to the level recorded in the previous survey (15.3 million sq ft, the highest since 2002) as developments are now taking longer to complete.
Mike Cracknell, director at Deloitte Real Estate, said: “Our data reveals that 3.3 million sq ft of office construction was not completed as scheduled between April and September and remains under construction. Had these projects completed on time, the total volume under construction would be almost a quarter lower.”
Leasing demand became the biggest challenge to new development this survey. The developers’ sentiment survey showed that 57% of respondents said letting conditions were either the same or worse when compared to the end of March this year.
Cracknell continued: “Of the developers we surveyed, a clear majority – 85% – pointed to weak tenant demand as the major obstacle to starting any new development. Until there is more clarity about occupiers’ office plans, developers will hesitate to embark on new projects, particularly speculative ones.Nonetheless, the news about vaccines has already resulted in a re-rating of real estate stocks, and may see both a bigger shift back to the office in the short term, and a strengthening of investor demand in London offices over the medium term.”
This reluctance to embark on new construction, especially new builds, has led to a shift towards major refurbishments. The survey found that more than two thirds of the new construction starts involved an extensive upgrade of existing office stock across 28 separate projects. “By transforming outdated buildings into COVID-safe, high-quality workspaces, developers are looking to upgrade and futureproof their offices in a market where occupational demand is increasingly discerning,” added Cracknell.
The City of London, which dominated construction activity in previous surveys, has seen new construction activity fall by 60% to 1.2 million sq ft across 10 schemes. This compares to 2.8 million sq ft across 16 schemes in the previous survey. Notably, just under half of the City’s new construction starts are available to let, again suggesting a lower appetite for speculative development.
Richard Hammell, UK head of financial services at Deloitte, said: “The financial services sector has for many years occupied the lion’s share of City office space, considering its office portfolio an essential part of doing business. Even before the pandemic, the sector was actively looking to reduce costs and consolidate its office presence in central London as many functions were distributed across the UK and offshore, and there was an increasing use of automation. The seismic shift in people working from home this year has served to accelerate this trend. While specific in-person aspects of business life most valued by this sector – such as business development, efficient trading, client engagement and employee collaboration – mean that offices will remain part of financial services, the nature and operational use of space will adapt in the years to come.”
Office development in the West End remained at the same level as in the previous survey, with 12 new starts breaking ground, equivalent to 500,000 sq ft. The Southbank saw five new starts over the summer, amounting to 350,000 sq ft, and Midtown observed a small uptick in new construction activity, with 500,000 sq ft across eight refurbishment schemes.
“Fewer new construction starts, especially projects built speculatively, are likely to take place in the short to medium term as a result of weaker occupier demand, the lack of development finance and the economic downturn,” explained Cracknell. “This lower level of new construction and substantial delays in office completions will have a major impact on future supply levels, leading to a self-correction which should prevent oversupply in the short term.”
Godley concluded: “The UK is leading the way with remote working across Europe. Nearly three quarters (72%) of UK employees would like to work remotely more often in the future – 10% higher than that of European peers*. Developers and investors are acutely aware of this growing trend and are thus in a state of suspension before committing to new projects, until there is more clarity in the market and occupiers reveal their future of work strategies.”
Note to editors
About the London Office Crane Survey
Deloitte Real Estate’s London Office Crane Survey was first published 24 years ago, and is updated every six months with the last survey published in May 2020. The data in this report is correct as at 30 September 2020.
The crane survey covers seven major central London office markets known as submarkets: The City, West End, Docklands, King’s Cross, Midtown, Paddington, Southbank, as well as three emerging submarkets: Vauxhall-Nine Elms-Battersea, White City and Stratford.
Deloitte Real Estate’s collection of central London development data commenced in 1985, and the first London Crane Survey was published in 1996.
The crane survey is the definitive review of office construction in central London, and is seen as a barometer of developer sentiment and future office supply. The report measures the volume and impact of office development (new build or significant office refurbishments of 10,000 sq ft or more) currently taking place across central London and analyses the pipeline of future development over the next four years.
The crane survey also features a ‘Construction Cost and Workload Sentiment Survey’ – a survey of main and subcontractors, capturing market sentiment on workload and price.
Deloitte Real Estate’s commercial property research team is focused on producing thoughtful and insightful publications, as well as comprehensive bespoke reports for investors, developers and occupiers. www.deloitte.co.uk/cranesurvey
*‘Voice of the European workforce 2020’ is a report by Deloitte’s Human Capital team and was published in October 2020. Deloitte’s European Workforce Survey collected the opinions of more than 10,000 workers across seven European countries: United Kingdom, France, Germany, Italy, Spain, Poland and Portugal.
In this press release references to “Deloitte” are references to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”) a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.
Please see deloitte.com/about for a detailed description of the legal structure of DTTL and its member firms.
Deloitte LLP is a subsidiary of Deloitte NSE LLP, which is a member firm of DTTL, and is among the UK’s leading professional services firms.
The information contained in this press release is correct at the time of going to press.
For more information, please visit www.deloitte.co.uk
Member of Deloitte Touche Tohmatsu Limited