New office construction in London hits record high – but developer optimism plummets

• 45 new offices schemes break ground in six months
• 15.3 million sq ft across 112 office schemes currently under construction in central London
• Developer and occupier optimism plummets amid COVID-19

Record high

New office construction in central London is at an all-time high with over five million sq ft of brand new office space starting construction in the six months to 31 March 2020. According to the London Office Crane Survey, the biannual construction survey by Deloitte Real Estate, 45 new schemes broke ground in the capital – almost double the long-term average.

Mike Cracknell, director at Deloitte Real Estate, said: “The high volume of new construction starts in this survey reflected a surge in optimism on the back of much sought-after political certainty as well as significant confidence in the London office market prior to COVID-19. However, this sentiment has now dramatically shifted as construction sites halted activity and central London offices remain largely unoccupied.”

The overall amount of office space currently being developed in the capital is 15.3 million sq ft across 112 schemes. This represents a 29% uplift on the previous survey and is higher than the long-term average by 41%.

Construction volumes in The City of London grew by 38% compared to six months ago, bringing the City’s total office space under construction to 7.3 million sq ft. This represents nearly half (48%) of all the office construction in central London and two new large City schemes alone total 1.6 million sq ft. Meanwhile the West End has been experiencing a steady rise in construction activity in the last few surveys with 2.6 million sq ft currently being developed. Docklands also has one million sq ft under construction across five projects.

Delays

“Delays are twofold in light of the COVID-19 pandemic – construction activity having been suspended and occupiers deferring letting new space”, continued Cracknell. “The Government has given the green light to allow contractors to return to building sites, subject to operational safety and social distancing rules.

“We expect at least three to six months of delays with interruptions in construction programmes, supply chain delays and labour shortages. The crane survey suggests many of the new offices expected to complete in 2020 will be postponed until next year. However, we believe any permanent halts to construction that is already underway is highly unlikely.”

Optimism low

Developer optimism is hinged on occupier demand. Deloitte Real Estate interviewed developers at the end of March and unanimously (100%) respondents answered ‘worse’ on their expectation for leasing demand in the coming months. None of the London developers interviewed felt that leasing conditions at this time were unchanged, positive or very positive.

Cracknell concluded: “Office occupiers will likely be reassessing their real estate needs - reflecting on costs, required occupancy ratios, ability to deliver and sustain critical functions, ease of access and overall business resilience.

“Our research shows that 10 office schemes equating to 1.4 million sq ft were on the verge of commencing construction in mid-March, all will now undoubtedly be under review. We foresee very few developments being launched in the next six to nine months as decisions will be deferred until there is more stability in the market.”

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About the London Office Crane Survey:

Deloitte Real Estate’s London Office Crane Survey was first published 24 years ago, and is updated every six months with the last survey published in November 2019. The data in this report is correct as at 31 March 2020.

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 Real Estate’s collection of central London development data commenced in 1985, and the first London Crane Survey was published in 1996.

*’Record High’ refers to the first London Office Crane Survey covering all seven submarkets which was published in 2002.

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 Survey’ – a survey of main and subcontractors’ sentiment to issues such as price, workload and labour.
Deloitte Real Estate’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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The information contained in this press release is correct at the time of going to press.

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