Developers are as pessimistic about London office lettings as during Covid

Developers of London office schemes are now as pessimistic about both the leasing market and their own construction pipelines as they were during the depths of the Covid-19 pandemic – in some instances even more so. London office developers expect the shift to hybrid working to reduce office space requirements in the capital by 10% over the long term, according to Deloitte’s winter London office crane survey. Although the trend towards refurbishment and a flight to quality space should drive stronger demand for grade-A offices, some 45% of developers said they see the current leasing market as “a little worse” or “much worse” than six months ago. That marks the highest percentage since Deloitte’s summer 2020 survey, when all respondents said the market was worse than at the start of the year. Developers were also downbeat about supply, with 55% expecting a decrease in their pipeline over the next six months, an even higher percentage than in any pandemic-era survey. Margaret Doyle, chief insights officer and partner for financial services at Deloitte, said that “things are tough, both from a supply and demand side”. Factors including “huge material cost inflation, supply chain disruption, some labour shortages”, as well as rising interest rates and funding costs, are all major contributors to developers’ concerns. This has seen developers exercise caution in a shift to refurbishment in established neighbourhoods. The survey found that the greatest volume of new office starts in central London was in the West End, where 1.2m sq ft of offices were begun between April and September. In the City, where figures in the survey were historically the greatest, the submarket recorded its lowest square footage of new construction in at least two years at 800,000 sq ft. Doyle added that developer pessimism is being fuelled by funding concerns. “If they are uncertain about the funding circumstances, they are uncertain about when they are going to start construction,” she said. Material and supply costs have delayed some large completions, a concern that has “become a bit more intense since the Ukraine crisis and other factors have impacted build costs”, added Doyle. Those delayed starts and completions will feed future supply, according to Deloitte, with 2023 pegged by the firm as “the year of the catch-up” on completions. The survey found 1.5m sq ft under construction and still available this year, a figure which grows to approximately 5m sq ft in 2023, with close to 3m sq ft under construction but already prelet. The survey found there is more than 15.6m sq ft of office space with planning permission but only a small amount with declared completion dates within the next five years. Doyle added that a shift toward West End construction and refurbishment has been in part due to ESG requirements. Asset owners with older West End stock are realising that they “will no longer be able to let this building” unless its sustainability metrics and other ESG elements demonstrate “the whole kit and caboodle” to potential occupiers, Doyle said. “For secondary space, there is a real risk of being stranded,” she added. Doyle said that when asked what they wanted around net zero targets, developers were resounding in their view that “they want clarity, net zero targets and legislation to support the commercial case”. To send feedback, e-mail chante.bohitige@eg.co.uk or tweet @bohitige or @EGPropertyNews See which agents are doing the most deals in the London submarkets with our On-Demand Rankings >> Photo © Frans Ruiter/Unsplash