London Office Crane Survey - Developers confident and construction activity strong despite rising costs

Developers confident and construction activity strong despite rising costs

• Overall, 36 schemes began in the six months to March, significantly ahead of the long-term average of 27
• The volume of office construction has increased by 4% to 13.5 million sq ft and remains above the 10-year average
• However, new start activity fell by a third to 2.3 million sq ft over the six-month period recorded, raising prospects of a medium-term supply shortage and accelerated rental growth
• Completed construction fell by half to 1.7 million sq ft, below the long-term average of 2.5 million sq ft
• Meanwhile, completions in 2022 are expected to reach at least seven million sq ft, potentially the highest since 2003
• With a minimum Grade B Energy Performance Certification (EPC) requirement anticipated by 2030, 80% of London office stock will need to be upgraded, an equivalent of 15 million sq ft per annum

Construction activity in London is continuing to demonstrate resilience in the face of cost pressures, with as many as 36 new schemes commencing over the six-month period recorded, according to the Deloitte London Office Crane Survey*.

Notably, 31 of these schemes comprise of comprehensive refurbishments. This is illustrative of evolving market drivers including both ESG and changing occupier needs as the return to offices continues.

With cost-related challenges potentially stemming near term activity, the survey tracked just five new-build starts – meaning the overall volume of new starts has fallen by a third in six months. However overall construction increased by 4% to 13.5 million sq ft and remains above the 10-year average of 12.1 million sq ft, for the fifth consecutive survey.

New office construction in the six months to March – comprised of both refurbishments and new builds – was at 2.3 million sq ft. Mike Cracknell, director in real estate at Deloitte, pointed out: “Increased new starts - especially of refurbishments - reflects anticipated renewal of existing stock to provide sustainable and quality space now strongly demanded by occupiers.”

Completed office construction also fell in the same period by half to 1.7 million sq ft, below the long-term average of 2.5 million sq ft, primarily caused by site delays.

Pipeline

Completions in 2022 are expected to reach at least seven million sq ft, which would be the highest volume since 2003.

Cracknell added: “A raft of delays, partly driven by supply chain disruption and labour shortages, contributed to a lag for developments to complete. Despite this, the market is displaying resilience with appetite amongst investors remaining strong. This coupled with occupier demand is contributing to confidence in the city.”

This sentiment is echoed by developers, with two-thirds saying they intend to increase their pipelines in the next six months.

ESG agenda shaping construction activity

New Minimum Energy Efficiency legislation currently passing through parliament is anticipated to radically tighten standards, with minimum compliance levels moving from Grade E to Grade B by 2030. The survey estimates that 80% of London office stock will need to be upgraded. This is equivalent to around 15 million sq ft per annum.**

Philip Parnell, real estate valuation and ESG lead at Deloitte, said: “The ESG agenda is far from new. But increasing levels of corporate reporting transparency, stakeholder pressure – including that from occupiers – and more stringent environmental standards, are undoubtedly driving investor and developer focus. We can expect to see continued growth in refurbishment activity to address value erosion caused by accelerating obsolescence and occupier choice.

“Appreciation of the embodied carbon within existing structures is growing. Brand new development will of course continue to happen, but the drivers and increasing preference to refurbish, re-use and recycle are clear.”

Leasing

Pre-letting activity remains broadly similar to previous surveys, with almost a third of space under construction being committed to by a tenant. Developers remain optimistic about the leasing market. Around two-thirds (65%) report that demand was “a little better” and 14% say it is “much better” than six months earlier.

Nonetheless, developers have increased their estimate of the impact of hybrid working on office demand. They predict it will reduce by 14% on average longer term, up from 11% in the previous survey.

The evolving city

In terms of sectors, the technology, media and telecommunications industry continues to dominate central London office demand – accounting for 28% of pre-let space under construction. Financial services has increased its share to almost a quarter (24%), while the legal sector accounts for 20% of pre-let space under construction.

Margaret Doyle, chief insights officer for financial services and real estate at Deloitte, said: “While occupiers consider how much space they will need in a new era of hybrid working, the market is also evolving. London is diversifying, with the accommodation of growing industries including life sciences in several sub-markets including East London.”

End

Note to editors

*Conducted twice a year, the London Office Crane Survey analysed office construction data over the six months to March 2022 and included a survey of London’s biggest developers conducted in March 2022.

**This equates to almost three times the survey’s annual average of completions (five million sq ft).

About the London Office Crane Survey:

Deloitte’s London Office Crane Survey was first published 26 years ago and is updated every six months, with the last survey published in November 2021. The data in this report is correct as of 31 March 2022.

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

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Deloitte LLP is a subsidiary of Deloitte NWE 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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