Improved confidence as volume of new London office construction increases

• The volume of new office starts has increased to 3.4 million sq ft, well above the survey’s long-term average of 2.4 million sq ft
• The proportion of new office builds, as opposed to refurbishments, has risen for the third consecutive survey to 46% of the total, up from 33% in the Winter 2020 survey
• Despite this, the structural shift towards refurbishments continues, driven by sustainability and concerns over embodied carbon
• Average scheme size has increased by 28%, suggesting greater risk appetite

London’s office market has seen a significant improvement in confidence with the volume of new starts and speculative appetite rising, according to the 25^th anniversary edition of Deloitte’s London Office Crane Survey¹. The volume of new starts increased by 10% from the previous survey in May, to 3.4 million sq ft between April and September 2021, well above the long-term average of 2.4 million sq ft.

Mike Cracknell, director in real estate at Deloitte, said: “The volume of new starts points to the resilience of demand for offices as an asset class, in spite of the dramatic shift in working practices in response to the pandemic and months of home working.”

Rising risk appetite and long-term sustainability

The average scheme size has risen by 28%, demonstrating a greater appetite to take on risk on individual schemes.

Although the survey points to a slight easing in the proportion of office refurbishments over new builds, the emerging trend shows a greater prevalence towards the former. Refurbishments now account for 54% of new start volume in this survey, compared to just 44% in the Summer 2018 survey.

Philip Parnell, real estate valuation lead at Deloitte, said: “The uptick in new builds over the past three surveys has not disrupted the trend towards refurbishments - a structural shift we believe is happening driven not least by sustainability considerations. In addition to the cyclical attraction of refurbishments in uncertain times, concerns over embodied carbon has also prompted an aversion to outright demolitions. The focus on refurbishment over redevelopment is unlikely to diminish as carbon accounting including embodied carbon and the drive to net zero continues to gather momentum.”

A quarter of developers said they expect all their new developments to be net zero by 2024, and 45% expect to achieve this between 2025 and 2029.

Construction volumes and outlook

In the six months to September the total volume under construction dropped to 13 million sq ft. However this is still above the long-term average of 10.7 million sq ft. Construction volumes have dropped in two consecutive surveys despite rising new start volumes. This has been driven by the recent completion of high volumes of development, held up by pandemic-related disruption. 

Over this survey period, 3.6 million sq ft of development² (via 43 schemes) has been delivered. Although less than last survey’s record volume of office space coming on to the market, the level of completion is higher than the long-term average.

Cracknell added: “The survey shows a rise in pre-lets of new construction starts with 19% observed this time, up from 10%. Alongside this, there have been high levels of speculative development - above the survey’s long-term average. This is reflecting developers’ ability to ‘look through’ the short-term effects of the pandemic to a future where occupancy and demand will rebound, even if working patterns and office configurations also change.” 

Leasing demand

Deloitte’s research also shows developers (90%) are more optimistic about leasing demand than six months ago, with more than a third (35%) finding it “much better” and 55% “a little better”. Reflecting this optimism about leasing demand, almost two-thirds (65%) of developers expect their pipeline to increase and none expect it to fall, compared to just 7% and 29% respectively in the Winter 2020 Survey.

In central London, 31% of under-construction offices are pre-let, which is consistent with the Summer 2021 survey results (32%).

The future of work

Developers are now much more sanguine about the impact of home working on demand for office space than they were at the onset of the pandemic in 2020. More than a third (37%) now expect home working to have no impact on leasing demand, three times the proportion (12%) compared to 12 months ago.

Siobhan Godley, real estate leader at Deloitte, said: “The London office market continues to recover from the disruption caused by the pandemic. Developers are optimistic as the market has become more buoyant and there is renewed confidence about the future.

“It’s clear that the focus for the future is on high-quality sustainable office space. Occupiers’ requirements are also changing as flexibility becomes a key priority to accommodate varying work patterns and the market is responding with a wider choice of leasing arrangements for offices. Amenities continue to be shaped by the impact of the pandemic, increasingly centring on promoting health and wellbeing; from improved ventilation and mindful spaces to removing unnecessary touchpoints such as lift buttons.”

Additional figures from the research showed:

• The legal sector’s share of lettings has jumped to 17%, against a five-year average of 9%, reflecting one-off office moves. By contrast, the technology, media and telecom sector’s dominance of lettings has eased to 28%, from 40% in the previous survey.
• The City and the West End maintain their dominance for new starts in this survey
• However new starts in Midtown are at their lowest since Q3 2019
• In contrast, there has been an upturn in the volume of new construction in King’s Cross and Docklands
• There were no new starts at Southbank or Paddington

-Ends-

Notes to editors

¹Conducted twice a year, the London Office Crane Survey analysed office construction data over the six months to 30 September 2021 and included a survey of London’s biggest developers conducted in September.

²This uptick in development, which by its nature is long term, seems consistent with the intentions of many finance leaders, as revealed by Deloitte’s Q3 2021 CFO Survey to place greater emphasis on increasing capital expenditure than at any other time in the past decade or more.

This year marks 25 years since the launch of the Crane Survey - then covering just the West End. In this anniversary edition the report analyses the past six months of activity and the results from our Developer and Construction Market surveys as well as looking to the future pipeline

About the London Office Crane Survey:

Deloitte’s London Office Crane Survey was first published 25 years ago and is updated every six months, with the last survey published in May 2021. The data in this report is correct as at 30 September 2021.

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’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’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

About Deloitte

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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.

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