London office starts grow as completions hit 18-year high

Construction starts of offices in central London have jumped by a fifth between October and March despite the pandemic’s impact on the market, according to Deloitte’s latest London Office Crane Survey. The number of new starts increased to 3.1m sq ft during the six months across 32 schemes, although this is down year-on-year from 5m sq ft in the same period in 2020. Mike Cracknell, director in real estate at Deloitte, said the figure has beaten broader expectations of a lower number of new starts in the capital. More than half (56%) of office starts were refurbishments, continuing a trend seen in the preceding six months. Cracknell said this reflected growing occupier demand for Covid-safe and higher-quality workspaces, and that occupiers are recognising there is a lot of “good 1980s building stock out there that is ready for refurbishment”. The biggest new start during the period was the refurbishment and extension of 80 Strand, WC2. Total volumes of office space under construction in London stood at 13.7m sq ft, falling by 9% during the period. Despite the decline, the total remained higher than the capital’s long-term average of 10.9m sq ft. Completion volumes reached an 18-year high, after 4.5m sq ft was delivered. Cracknell said this record level was partly down to delays caused by the Covid crisis. The level of preletting in new construction plunged to just under a fifth (19%), from 45%. However, Deloitte said the higher proportion of speculative development suggests that developers have maintained a degree of confidence in prime office lettings. Less than a third (32%) of all London office space under construction has been prelet. Leasing demand improves An 85% majority of developers cited weak tenant demand as their biggest concern, as the prospect of a shrinking leasing market continued to weigh heavily on their minds. This remained the biggest deterrent to new development. Despite this, more than half (57%) of developers pointed to signs of improvement in leasing demand over the past six months. Similarly, 57% of developers are seeking to increase their pipelines in the next six months, compared with 7% six months ago. Bo Glowacz, real estate insights lead at Deloitte, said this underlined confidence in sufficient longer-term demand, particularly Grade-A office space. In the meantime occupiers have been “buying time” to work out their real estate strategies through lease renewals and extensions, with market disruption allowing for more favourable lease terms. Technology, media and telecom occupiers accounted for 40% of prelets, which was the lion’s share of the total amount of space under construction in London. Financial services amounted to 16%. Deloitte said that where financial services firms aim to reduce their office footprints in the capital, other sectors such as TMT, legal, medical, healthcare and education may “capitalise on market disruption to secure more favourable lease terms”. West End leads the way The West End and Midtown were the main hotspots for new projects. New office starts in the West almost doubled during the six-month period, reaching 0.9m sq ft across 14 developments. Nearly two-thirds were new-build projects. Similarly in Midtown, 0.9m sq ft of new projects began. This consisted of eight schemes. The City posted a steady level of new construction, chalking up 1.3m sq ft. Only two schemes – 40 Leadenhall, EC3, and 8 Bishopsgate, EC2 – were new-build projects. There were no new starts in the South Bank, Docklands, Paddington or King’s Cross submarkets. ‘Stranded assets’ The amount of empty lettable space in central London reached its highest levels for more than a decade. This was driven by a 50% year-on-year surge in second-hand availability, which represented three quarters of all existing available supply. Deloitte said this, combined with a growing occupier focus towards net zero, ESG principles and staff wellbeing, will further polarise the market and usher in “a new era of ‘stranded assets’”. Elsewhere, the shift to homeworking is broadly expected to reduce office demand by a modest 10-15% on average in square footage terms. Developers outlined the likelihood that a reduction in occupation would be offset by growing requirements for lower density occupation, less hot-desking and more collaborative space – all of which involve additional space. To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews Image: Geoff Robinson Photography/REX/Shutterstock