The volume of new starts is up by almost 80% over the Winter 2022 survey Central London: Volume and number of new starts per survey Source: Deloitte With 4.4 million square feet (sq. ft.) of new construction starting across 50 schemes, there is a notable increase in the number and volume of new starts compared to the previous survey period. The average new scheme size rose to c.88,000 sq. ft. from c.79,000 sq. ft. in our previous survey. It is important to note that Citigroup's 900,000 sq. ft. owner/occupier refurbishment of 25 Canada Square represents approximately a fifth of the total volume of new starts. Excluding this scheme, the Summer 2023 survey records 3.5 million sq. ft. of new starts across the remaining 49 schemes, still a substantial c.43% increase over the 2.5 million sq. ft. of new starts recorded in the Winter 2022 survey. This could partly be attributed to pent-up demand caused by supply chain issues, labour shortages and the time taken to complete the planning process. It could also be partly driven by the increased pressure to refurbish space that is under the threat of obsolescence. Continued letting of commercial space with an EPC rating below E became unlawful as per the latest minimum energy efficiency standards (MEES) regulations which came into effect in April 2023. Occupier demand for best-in-class space is still a key driver in the leasing market. This continues the disparity that we have long highlighted between "The Best" and "The Rest" in the London office market.

This survey has seen the start of the highest volume of refurbishment schemes on record Central London: Volume of new starts - new build vs. refurbishment Source: Deloitte With 37 new refurbishment schemes starting, covering a total volume of 3.2 million sq. ft., this survey period records the highest number and volume of refurbishment starts since we started tracking them across the seven Central London submarkets in the Summer 2005 London Office Crane Survey. Drivers of the trend towards comprehensive refurbishment include occupiers’ continued flight to higher quality accommodation that aligns with their market profile, talent attraction and retention agendas, and evolving approaches to working practices. It has been noted that securing Planning consent for refurbishment projects has recently proven to be easier to obtain when compared to new build permissions. This, along with, the anticipated MEES regulations that will require office buildings to achieve EPC C by 2027 and EPC B by 2030, are also contributing to this trend. West End new starts are up for the second consecutive survey while the City has seen a reduction in activity over the last two survey periods Central London: Volume of new starts by submarket Source: Deloitte The West End has seen an increase in the volume of new starts for the second consecutive survey while the City has seen a reduction in activity for the third survey in a row. Southbank has seen a significant increase in the volume of new starts, which can be attributed to three new developments: 1 Southwark Bridge Road, TIDE, and Tower Bridge Court. The high volume of new start activity in the Docklands, on the other hand, is entirely due to Citigroup’s refurbishment of its EMEA headquarters at 25 Canada Square, at the heart of Canary Wharf. The West End is a market of increasing occupier focus. Businesses are opting to encourage office attendance more proactively and are considering how to attract employees back to the office. Post Covid-19, occupiers are fitting out space in new ways. There has been a shift away from the traditional banks of desks of the past to make way for amenity-rich space. This is often more open, collaborative space for mentoring and creative work, wellness rooms, luxury coffee facilities, etc. In addition to more attractive interiors, the West End offers rich cultural amenities. High completion levels are currently expected towards the end of 2023, though the trend of completion delays may push some into 2024 Central London: Total volume of space completed per survey Source: Deloitte This survey recorded the delivery of approximately 3 million sq. ft. of completed office space across 30 schemes in Central London. As we expected, this is significantly lower than the 6.6 million sq. ft. that had previously been scheduled to complete over this survey period. 22 schemes, covering 3.6 million sq. ft., have now pushed their estimated completion dates to the remaining three quarters of 2023. This has raised the estimated completions for the Winter 2023 survey to over 5.3 million sq. ft. across 64 schemes. Yet again we do not expect this entire volume to be delivered within the next survey period. Continuing completion delays are likely, driven by ongoing global supply chain issues as well as rising costs and shortages of labour and building materials. This delay could be beneficial to the leasing market as a slower feed of available prime space will help sustain rental levels for best-in-class office space. With the new start volume exceeding the completion volume over the survey period, the volume under construction has risen by 12% over the previous survey Central London: Total volume under construction per survey Source: Deloitte As of 31 March 2023, there are 123 schemes under construction across the Central London market, comprising 14.4 million sq. ft. This represents a 12% increase over the total construction volume of 12.8 million sq. ft. recorded in our previous survey. To perform the required decarbonisation retrofits, a significant increase in the construction workforce will be necessary. There will have to be significant investment in recruitment and specialised training to meet London’s construction requirements. For best-in-class space, it is expected that rents will continue to experience upward pressure due to the limited supply. This means that even if it is expensive to complete developments, the appetite for top calibre office space could generate longer lease-term commitments and robust rental performance. Developers perceive a somewhat stable leasing market Developer Survey: 'Compared to six months ago, how do you currently perceive the leasing market?' Source: Deloitte Our survey respondents perceive a more stable leasing market. Post-pandemic the London office leasing market has demonstrated its resilience by recording buoyant levels of take-up (albeit heavily focused on Grade A). But rises in interest rates and inflation and other macroeconomic headwinds have injected some caution into the market. While rising costs and inflation are still a concern, businesses are cautiously optimistic that increases will begin to moderate in coming months. This could explain the more balanced outlook for the current leasing market when compared to six months ago. There is still a need for office space, despite hybrid working and tenants’ shift in focus towards quality over quantity. Confidence about demand seems to be reflected in developers’ sentiment that the leasing market has become more stable. Legal sector pre-lets largest proportion of space in current ongoing construction projects Central London: Percentage of pre-completion lettings by sector Source: Deloitte 5.3 million sq. ft., which represents 36% of the total volume under construction in Central London, has been pre-let as of the end of March 2023. Legal occupiers have taken 31% of this volume, making it the most active tenant sector. The dominance of legal sector pre-lets reflects a structural shift in terms of the type of space required: from cellular to more open plan; from full-time office to hybrid working; and towards improved sustainability ratings. With the technology sector announcing significant job cuts, it is not surprising that it is less active in the pre-let market, which requires significant commitment in terms of both rents and lease lengths. The largest technology, media and telecom (TMT) take-up in the schemes currently under construction is Google's pre-let in its King's Cross development which took place in 2018 and which is yet to complete. Rents are expected to experience positive growth due to the competition for upgraded office space, where the focus is on sustainable and energy efficient stock. Developers expect office space demand to increase due to the opening of the Elizabeth Line, though just a third say their development plans are affected by it

Developer survey: To what extent do you believe the opening of the Elizabeth Line has influenced demand for office space in London?

Source: Deloitte

Developer survey: How has the opening of the Elizabeth Line impacted your plans concerning the type and location of future office developments?

Source: Deloitte Developers seem confident that the opening of the Elizabeth line will influence office demand in areas close to the new stations. Developers have been aware of the plans for the Elizabeth Line and the resulting expansion of transit links across London for more than a decade. This has probably affected their development plans in the past. The Elizabeth Line formally opened in May 2022 instead of in December 2018 as a result of delays and ballooning costs. We can see from developers’ responses that they are less certain about how the line’s recent opening will affect their future development plans. This might explain why almost half of surveyed respondents stated that they are still evaluating its impact. The opening of the new line has increased connectivity across Central London, which could result in an uptick in value of office space in the vicinity of these stations. Given very high rents in Central London, the Elizabeth Line may over time enable commuters to relocate out of Central London to less central and less expensive locations along the route.

Developers are quietly optimistic about the future of London’s development pipeline Developer survey: 'Compared to six months ago, how do you expect your pipeline to change in the next six months?' Source: Deloitte The respondents to our developer survey are slightly more optimistic on the near-term prospects for their Central London development pipeline when compared with the previous survey. While their optimism is inevitably tempered by geopolitical concerns and macroeconomic headwinds, it is also buoyed by the expectation of a slowdown in construction cost inflation in the near future. Ordinarily, adverse geopolitical issues, high costs (for materials, labour and energy) and interest rates are factors that would cause developers to be hesitant to start new development schemes, at least in the short run. But we believe factors such as the underlying strength of tenant demand for Grade A office space with high sustainability credentials and the pressure to meet the deadline to achieve EPC B by 2030 are stimulating the development – or at least, refurbishment – pipeline.

Costs and economic environment seen as the biggest challenges to construction by developers Developer survey: 'What are the biggest challenges to development today?' Note: *Options introduced in the Summer 2023 survey Note: ** Previously listed as “Brexit” and “Covid-19”, now expanded to “Economic Environment” to include factors like “Inflation” and “Business Confidence” Source: Deloitte Construction costs and the economic environment are perceived as the biggest challenges by respondents to the latest developers’ survey. When asked about specific components that they see as the biggest challenge, most pointed to the cost of materials, labour costs and inflation. These are followed by business confidence, funding issues caused by higher interest rates, and the impact of the increased appetite for sustainable space on confidence in the leasing market. Project finance costs have also remained elevated since our last survey. The step change in interest roll-up costs in H2 2022 continues to cause feasibility issues. The problem is especially acute for developers that acquired sites before the Bank of England began to raise interest rates in late 2021. Lower debt advance rates against project costs are largely a result of lower projected cashflow ratios at stabilisation. Developers see labour and materials as the biggest construction cost challenges Developer survey: 'What are the biggest challenges to development today?' - Construction cost breakdown Source: Deloitte Labour and materials continue to be the top drivers for construction costs. Labour shortages and supply chain issues that limit the access to construction materials means that firms are placing orders in bulk. Technology has been an important factor in efforts to improve the resilience of supply chain planning and execution. Several companies have significantly increased their investments in digitisation of supply chains. According to the latest corresponding S&P Global/CIPS UK Construction Purchasing Managers' Index (published 06 April 2023), suppliers continue to attribute the rise in input prices to rising staff wages and elevated energy costs. The report also found that respondents noted improved availability of construction materials and reduced logistical bottlenecks in March 2023. Labour and materials remain the largest price drivers If you have expressed a change in your prices over the last 12 months, we would like to understand what has driven this change. Source: Deloitte Materials and labour remain the largest price drivers in this survey. Energy also continues to be a major cost driver. Skillsets are noted as falling short within the industry; this will have a longer-term impact on the ability to keep costs down. Firms continue to place bulk orders of materials to reduce delivery delays and fix prices. Respondents suggest that transparency with clients is vital to enable them to make better decisions and reach successful outcomes. Environmental Product Declarations, in which contractors state the environmental impacts of the products they are using, are beneficial for sustainability targets but add to the overall project cost due to the management and administration fees. UK CFOs cite geopolitics and labour shortages as the top risks to business, according to Deloitte CFO survey Risk to business posed by the following factors Source: Deloitte Respondents to Deloitte’s latest CFO Survey rated geopolitics, followed closely by persistent labour shortages, as the top risks to business. According to the respondents, recruitment difficulties have eased considerably in the first quarter. Yet almost a fifth of CFOs report that their businesses experienced significant or severe recruitment difficulties or labour shortages in that period. They do expect this to improve over time, with a marginal improvement over the next 12 months and the elimination of significant or severe recruitment difficulties in two years’ time. The risk to business posed by high energy prices or disruptions to energy supply reported in this survey is significantly lower than in the previous edition. This is largely due to the near 70% drop in wholesale gas prices since December 2022. CFOs report a fall in supply disruptions faced by their businesses. A small proportion of panellists surveyed expect significant or severe levels of disruption to persist in a year’s time, but the entire panel expects this disruption to recede in two years' time. CFOs expect inflation to fall to 4.2% within a year and to 2.9% in two years’ time. The fall in inflation expectations is likely due to an easing of the supply disruptions and labour shortages mentioned above. Expectations of future workload growth have improved compared to the previous survey Workload: Considering your workload today, how do you think this will differ in 12 months' time? Source: Deloitte The average expectations for the growth in workload over the coming year have improved to 5% this survey from 3% in the last survey. This remains below the peak of 7% recorded in the Winter 2021 survey. 42% of respondents say their growth is coming from an increase in demand and the construction market overall, while 34% see their growth coming from acquiring a larger share of the market. Feedback gathered from our survey suggests that the building trades have 60% of their work over the next 12 months already accounted for. This is in line with the levels reported in the previous survey. Rate of price rises lower than previous survey What is your view as to how your prices will change over the next 12 months? Source: Deloitte The rates at which prices are rising are lower than in the previous survey. However, average price rises are still at extremely high levels. Envelope (external cladding) trades are showing greater volatility. Many respondents expect prices to continue to rise. They are also experiencing a worsening in their ability to import, greater bureaucratic challenges, and delays at customs. For external works, material prices have settled but labour continues to be a cost driver.