London office new starts hit record high

London has logged its highest ever volume of new office starts, according to research from Deloitte. The latest instalment of the accountancy firm’s biannual London Office Crane Survey tracked 5.1m sq ft of new construction starting across 43 schemes in the capital. This is nearly 16% higher than recorded in the previous survey, despite seven fewer schemes starting. The average new scheme size has increased to 119,000 sq ft from 88,000 sq ft. It marks the highest volume of new starts since the survey began recording new construction activity across seven central London submarkets in 2005. Driven by impending stricter Minimum Energy Efficiency Standard regulations and an uptick in demand for premium office space, the number of refurbishment starts has broken records for the second consecutive survey, with 34 schemes covering 3.3m sq ft on the way. Sophie Allan, director in real assets advisory at Deloitte, said: “New builds have roared back from their post-pandemic nadir, which has likely been driven by large prelets and growing developer confidence in the demand for premium office space.” She added: “Meanwhile, refurbishments continue to play a critical role in London’s development pipeline as the increasing need to modernise office space to avoid obsolescence grows. The future will see further skyscrapers added to the City’s skyline, with three large developments recently obtaining planning permission.” Make your bets As the construction industry starts to “catch up” following the pandemic, demand for premium office space remains high and continues to push new starts. But the supply chain issues and construction delays that have plagued the industry in recent months are far from cured, pushing completion dates ever further out. Around 40% of the collective new start volume in the past six months was attributable to spades in the ground on five schemes of more than 300,000 sq ft. This, plus the completion of nearly 4m sq ft of office space across 45 schemes in central London, has resulted in a total of 6m sq ft of space across 61 sites expected to complete by summer 2024. “Interestingly, developers we have spoken to seem to be more concerned about the supply of, rather than demand for, premium space. With the increased volume of new starts and completions reported this year, there is a healthy amount of prime office stock on its way to the market,” said Margaret Doyle, partner and chief insights officer for financial services and real estate at Deloitte. However, the current macro environment and geopolitical backdrop provide greater complications for the future of the London office market. In addition, this “implies significant uncertainty about the future path of energy prices, inflation, and interest rates”, added Doyle. “But for now, developers seem prepared to bet that, if they build premium office space, the metropolis will continue to attract occupiers.” Square Mile versus West End The City of London submarket has come back strong, according to the survey, with 2.4m sq ft of office space starting across 16 schemes. This includes the start of two large new builds and the biggest refurbishment start of the survey, which combined represent almost 1.4m sq ft of new starts. This marks a continuation of the City’s longstanding trend of creating large-scale new builds (over 500,000 sq ft) with sizeable floorplates, a trend which has continued as occupier demand for grade-A office space shows no sign of slowing down. Doyle added: “The leasing market is seeing activity pick up as more occupiers are starting to firm up their working patterns. The City could see a further uptick in activity as the appetite for premium office space from certain sectors – such as professional and financial services – applies positive demand pressure.” In the West End, new starts have declined by 13% since the last survey to 1.1m sq ft, a statistic at odds with the high levels of take-up in the submarket but which Deloitte attributes in part to a recent spate of completions. Meanwhile, one monster completion can change the course for an entire submarket, as was the case in the South Bank which recorded an increase of 19% this survey period, driven by a 385,000 sq ft refurbishment. To send feedback, e-mail chante.bohitige@eg.co.uk or tweet @bohitige or @EGPropertyNews