Volume of new starts increases slightly compared with last survey, but remains below ten-year average
Central London: Volume and number of new starts per survey
31 schemes with a total volume of 2.5 million square feet (sq ft) were started between April and September 2022. This represents a 6% rise in volume over the 2.3 million sq ft started during the previous survey, but remains below the ten-year average of 2.9 million sq ft.
Average new scheme size rose to 79,000 sq ft from 69,000 sq ft in our previous survey. This is largely due to the 556,000 sq ft refurbishment of BT's former headquarters at 81 Newgate Street, started in Q2 2022. Notably, the three largest schemes in our latest survey account for 41% of the total volume of new starts.
There are 26 schemes currently in demolition/strip-out, with a total volume of 4.3 million sq ft. These are expected to start construction during the next survey period, between October 2022 and March 2023, and will probably drive a significant rise in new start volumes in our next survey.
Two major new build starts provide major uptick over Q1 2022, but refurbishment activity continues to dominate
Central London: Volume of new starts - new build vs. refurbishment
Refurbs remain a strong feature of new construction activity, with 26 of 31 new starts categorised as refurbishments, comprising a total volume of 1.7 million sq ft. This includes the refurbishment of BT's former headquarters at 81 Newgate Street, which on its own accounts for 556,000 sq ft.
Elsewhere, over the past year, we noted the absence of larger new builds over 300,000 sq ft. None were recorded during the latest survey period, although two new build starts of over 200,000 sq ft helped bring the total volume of new build starts to 781,000 sq ft. This figure will likely continue to increase in the short term, with eight new builds each bigger than 300,000 sq ft currently in demolition. Nevertheless, over the longer term, we anticipate increasing drag on new build activity. ESG considerations have made local authorities less likely now to grant future demolition permits. In addition, the relative risk of new build projects versus refurbs may render the latter a more attractive proposition as the UK economic picture darkens.
Following the UK pandemic lockdowns, another trend has been for developers to refurbish more large schemes of 200,000 sq ft and above, driving a relatively steady volume of refurbishment activity between surveys. During the same period, the volume of new build starts reduced, with fewer very large schemes of 300,000 sq ft and above commencing.
Caution over working patterns leads to shift to refurbishment and established neighbourhoods, as hybrid working drives increasing demand for Grade A office space
Central London: Volume of new starts by submarket
With 18 new starts at a total volume of 1.1 million sq ft, the West End saw the highest number and volume of new starts this survey. By contrast, the City had about 0.8 million sq ft of starts this survey across six schemes, with 81 Newgate Street accounting for more than half of this amount. Midtown had about 0.3 million sq ft of starts across four schemes, while the Southbank saw about 0.1 million sq ft across three schemes.
Docklands, King's Cross, and Paddington saw no new starts this survey. This lack of activity is not unusual however, since these markets (especially King's Cross) tend to see short bursts of activity when large new schemes (usually new builds) are started.
The age of many buildings across the core sub-markets of the City, West End and Midtown is expected to fuel the trend towards refurbishment as the concept of "stranding" of buildings (because they are unable to meet more stringent climate and wider ESG demands, leading to a devaluation of the assets) becomes more embedded within asset management strategies.
Continuing shortage of materials and supply chain failures push more completions out into 2023
Central London: Total volume of space completed per survey
Completions are up by 71% over our last survey, with about 3.0 million sq ft delivered across 29 schemes during the latest survey period. However, we noted in our previous survey that we expected at least 4.0 million sq ft to complete during this period.
Volumes were lower than previously expected as 20 schemes totalling 1.6 million sq ft were delayed by one-to-two quarters. This pushed projects into the next survey period and continues the trend seen in our last survey.
If completions are on schedule, more than 6.0 million sq ft should be delivered in the next six-month survey period. Nonetheless, given what developers have told us about the continuing disruption caused by material shortages and supply chain failures, we expect the market will undershoot this figure once again.
Completions have exceeded new starts, leading to a slight decline in volume under construction
Central London: Total volume under construction per survey
As of 30 September 2022 there are 108 schemes under construction across the Central London market, with a total volume of 12.8 million sq ft. This represents a 5% decline over a total construction volume of 13.5 million sq ft in our previous survey.
We do not believe this indicates weakening activity, since the total volume of new construction starts is higher this time around. Rather, the drop in overall volumes is due to the total volume of completions exceeding that of new starts.
This trend of declining 'under construction' volumes against a backdrop of rising new starts is also likely to continue in the future, driven by the ongoing shift toward refurbishment. Planners' increasingly favourable view of the 'reuse and recycle' approach that refurbishment provides, may make it more attractive than a new build solution, where the perception is that the carbon cost is greater. Refurbishments may also be quicker to deliver, adding to their attractiveness.
Developers grow more cautious on leasing market conditions
Developer Survey: 'Compared to six months ago, how do you currently perceive the leasing market?'
Following a sustained period of optimism, developers are beginning to grow increasingly cautious about the state of the London office leasing market. Only 36% reported improving leasing demand over the past six months, compared to 45% who reported softening demand over the same period.
Interestingly, this caution comes against a backdrop of recovering leasing activity following the sharp declines seen in the wake of the pandemic. This upswing in demand began in Q3 2021 and continues into this latest survey period.
Nevertheless, in the face of intensifying UK and global economic headwinds, developers are clearly becoming more cautious about whether this nascent recovery in leasing demand will be sustainable over the longer term. We would also note that a reduction in supply could temper any downward trend in rental values, arguably providing a more positive medium-term stimulus from a rental growth perspective.
Developers expect the ongoing shift to hybrid working will reduce overall requirements for office space by 10% per head over the long term
Developer Survey: 'What impact will homeworking have on the amount of office space tenants will be taking long term?'
Developers told us they expect firms will require less office space per head going forward. The majority (70%) think demand will decline by 10% in the long term, a trend we believe is driven by an accelerating shift to hybrid working.
Tenants are increasingly seeking better quality office space with higher sustainability and wellness ratings. This is evident in our latest leasing data, with the largest leasing deals focused on space in recently completed, under construction and soon to start schemes.
We expect overall demand for Grade A space to increase over the long term, despite reduced total office requirements per occupier as a result of this overarching trend.
Legal sector pre-lets largest proportion of space in current ongoing construction projects
Central London: Percentage of pre-completion lettings by sector
Our data shows that 31% of volumes under construction as of 30 September 2022 had already been let to tenants. The legal sector (comparatively small compared to all real estate occupiers in London) has seen the largest proportion of under-construction pre-lets, representing one-third of total pre-completion let volumes. Of this letting volume, we note that Kirkland & Ellis secured 218,581 sq ft at 40 Leadenhall in June 2022. This was the largest legal leasing deal signed during the survey period. However, looking at all current ongoing construction projects, we would also note that this deal is still overshadowed by Linklaters’ leasing of 379,000 sq ft at 22 Ropemaker in February 2020.
By contrast, the share of pre-completion letting volumes taken by financial services firms has shrunk by almost half in under five years, as the effects of cost-cutting and Brexit combined to reduce the sector’s London footprint.
Looking at all office leasing deals for spaces above 50,000 sq ft across Central London, not just those under construction, we see that most deals were struck by financial services and legal firms here too. These deals were concentrated in the City and West End areas of Central London. Also, in the majority of cases, the stated reason for these deals was a desire to move to accommodation with stronger ESG credentials, supporting employee wellbeing and the brand image of the occupier.
Emerging submarkets see no new construction activity over the past six months
Other submarkets: Total office space under construction
With no new starts, and only one completion in White City during this latest survey period, the total amount of under construction activity in our emerging submarkets has dropped by 9% to about 1.4 million sq ft since the previous survey, when the total stood at around 1.6 million sq ft.
Vauxhall-Nine Elms-Battersea (VNEB) has only one scheme expected to complete next survey, which should add about 30,000 sq ft to the emerging submarkets. The remaining schemes in VNEB and Stratford are expected to deliver in late 2023 and 2024.
Gateway Central and 1 Wood Crescent in White City are on course for completion in the next survey period, adding 390,000 sq ft of office space to the emerging submarkets.
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