London office overhauls hit record high in fight to avoid obsolescence

London has seen a total of 37 refurbishment schemes starting, totalling 3.2m sq ft over the six months leading up to March, according to Deloitte’s summer Crane Survey 2023. The figure is the highest number and volume of refurbishment starts across the seven central submarkets since the company started collecting data on them 18 years ago. Driving this shift is an awareness of the forthcoming Minimum Energy Efficiency Standard (MEES) regulations and the impact that they would have on existing non-compliant stock. In a bid to avoid stranded assets, developers have pivoted toward renovation rather than rebuilding. Margaret Doyle, chief insights officer for financial services and real estate at Deloitte, said that “developers are working in the dark” and “are looking for further clarity around net zero”. “We don’t have the detail of the regulations, but we anticipate that there will be a minimum EPC rating required of A or B by 2030 and we think that therefore there is a massive shift and pivot towards refurbishment to avoid obsolescence and to avoid stranding,” she said. This was echoed by Philip Parnell, real estate valuation lead at Deloitte, who said: “At a time when many of the traditional drivers of development activity such as capital value growth are lacking, a combination of positive ESG-related opportunities and downside stranding risks associated with physical obsolescence and accelerated value erosion, means there is strong stimulus for renewal.” Cautiously optimistic Market demand for prime, grade-A office stock in the capital has continued to bolster occupational markets in recent months, despite rising inflation and uncertain capital values, and this has ensured a strong development pipeline for the upper echelon of office stock. Sophie Allan, director in real assets advisory at Deloitte, said: “Developers seem to be cautiously optimistic about the future of London’s development pipeline.” Overall, new office starts have risen by almost 80% in comparison to the Winter survey in 2022, with volume now at 4.4m sq ft and new construction starting across a total of 50 schemes. During this period the average new scheme size has also increased from circa 79,000 sq. ft to circa 88,000 sq. ft. Another key factor in the acceleration of refurbs is the ongoing war for talent which has seen employers look to their real estate as a tool to attract and retain the best and brightest through office space that reflects their brand values and embraces post-Covid working practices. But postcode still takes priority, as the West End new starts have risen for the second consecutive survey with the volume now 1.3m sq ft. What is “pulling people” to the area, is the “combination of an aspiration for net zero” and “this new idea of earning the commute and the desire to have, a package around the office,” said Doyle. She added that this is “partly what is within the office itself, whether it’s the fit out or external space, but then also what’s in the immediate vicinity”. Unlike the West End, the City, which has seen a consistent decline in activity over the last few surveys, has dropped to just under 600,000 sq ft despite growing demand for grade-A stock across all submarkets. “We have come to see the City as synonymous with financial services but actually if you go back a few hundred years, you will have seen the silversmiths, the butchers, the leather makers, the cloth makers. You had a whole ecosystem and I think that the City Corporation is, as an institution, looking at [reimagining] that,” added Doyle in reference to the Destination City project. Costs delay construction Figures also showed the continued impact of high build costs and construction delays, as a total of 22 schemes covering 3.6m sq ft which were estimated to complete during the last six months have delayed their completion dates to the remaining three quarters of 2023. Allan added: “Whilst construction levels remain high, developers are acutely aware of elevated construction costs, which remains the biggest challenge, with both labour and material seen as major drivers.” This has resulted in an inflated development pipeline for the year, with more than 10m sq ft now projected to complete over the next nine months, putting the year on track to catch-up with many long-delayed completions. See more property and land information for London To send feedback, e-mail chante.bohitige@eg.co.uk or tweet @bohitige or @EGPropertyNews Photo © Karol Kozlowski/imageBROKER/Shutterstock