“Commercial development across Central London has risen 12 per cent with 7.2 million sq ft now under construction; but sentiment is shifting”
Despite the economic uncertainty, the recovery in development activity seen six months ago has been sustained over the last six months with 22 new starts recorded. According to the latest Drivers Jonas Deloitte Crane Survey, the total office space now under construction in the capital has increased by 12 per cent to 7.2 million sq ft (from 6.4 million sq ft six months ago and only 2.7 million a year ago).
Anthony Duggan, partner and head of research at Drivers Jonas Deloitte, said: “The next 24 months no longer looks as devoid of delivery as it has over the last few surveys, however, delivery of new space remains low compared to historic levels. The question now is whether the market needs this new space given the weakening economic environment. The answer, as always, will depend on location and size of the schemes being delivered. The comfort for developers will be that despite this increased development activity the volume of total delivery still remains some way behind long-term levels.”
The latest survey observes the trend for comprehensive refurbishments, noting some developers are holding back on the demolition ball, in favour of this quicker to complete and often cheaper delivery strategy. Another clear trend is that the schemes being started are significantly smaller than six months ago. Whilst there are only three fewer schemes than last survey (22 as opposed to 25) the total volume of space started over the last six months has fallen 66 per cent and the average new scheme size has fallen from 195,000 sq ft to 72,000 sq ft. This is unsurprising given the size of the towers recorded as new starts when the survey was conducted early in the summer.
The City
The London crane survey records seven new starts with a total of 3.1 million sq ft under construction – an 11 per cent increase on six months ago.
The increase in new starts is not solely attributed to developers breaking ground. It is also the result of a number of significant refurbishments of existing buildings bringing a total of 362,000 sq ft across five sites, the largest being 135,000 sq ft at 199 Bishopsgate, EC2, being refurbished by British Land and Blackstone to be completed in Q3 2012.
The survey highlights that scheduled delivery of offices for 2012 will be the lowest in 10 years at 443,000 sq ft with little chance to deliver any additional new space into next year given the time it takes to complete a scheme. 2013 will be lower still with just 355,000 sq ft currently under construction across two schemes although this may still increase.
Matthew Elliott, partner and head of the City team, added: “Two towers, The Leadenhall Building and 20 Fenchurch Street, arrive in mid 2014 but until then we will have the lowest supply of new space the City has ever seen. This normally leads to rising rents but only if there is are tenants to take it and businesses are very cautious at the moment.
“Some businesses are shedding both staff and second-hand space but others, we’re working with, are looking to the future and planning large new offices when leases on their old buildings end.
“I think we will continue to see demand for high quality, large, efficient buildings while poorer buildings will be harder to let. But for these there is increasing developer appetite for hotels, residential and retail. For many years the City has been principally an office district but the world is changing and perhaps this will change too.”
The West End
The squeeze on available Grade A space in the West End continues as eight new starts are recorded this survey totalling 2.3 million sq ft under construction. Of this, 1.1 million sq ft is scheduled to be delivered in 2012 over 12 projects, five of which are new builds.
In contrast to the City, the current pipeline of construction that is underway stops at the end of 2013 and the survey suggests we will see several new projects start next year in order to deliver in 2014. Grade A space is again becoming an increasingly rare commodity in the West End and currently amounts to just 9 per cent of the total available space. The greatest squeeze is in the North of Oxford Street submarket with vacancy at just 3 per cent as occupiers see this area as a credible alternative for traditional Mayfair occupiers. Developers are echoing this demand and the area will see 267,000 sq ft delivered over the next two years. In Soho, the squeeze is equally as tight for Grade A space at just 5 per cent although this is expected to be remedied in part with the delivery of 248,000 sq ft across three buildings that are currently underway.
Stephen Peers, partner and head of West End agency and national leasing, said: “The outlook for the West End shows a steady flow of space completing in the next two years, albeit delivery remains below the long-term average level of Grade A take-up and developers should be looking at construction to capitalise on a potential under provision. Unlike the City, the backbone of the tenant demand looks far more solid with a more diverse range of occupiers led by the strongly performing telecommunications, media and technology sector which we expect to remain active.”
The crane survey continues to detail activity in London’s other markets and interprets Midtown as remaining active with four new starts, totalling 178,000 sq ft. Although the number of new starts is down on the last survey, the total volume of floorspace being constructed is now up three-fold on the level seen in 2010 with a total of 10 schemes now underway delivering 643,000 sq ft over the next two years.
The Southwark market continues to flourish with the addition of two new starts this survey delivering 55,000 sq ft of new space and a refurbishment of 17,000 sq ft of expansion space.
Development in both Paddington and, on the other side of town, E14/Docklands remains quiet with no office construction activity starting for over a year now.
Duggan concludes: “The level of new construction activity hints at confidence but in reality we have seen a significant weakening in sentiment over the last few months. The global economic and financial situation weighs heavily on occupiers and, as the recent ‘Deloitte CFO Survey’ highlights, corporates are becoming more defensive, with cost control, rather than expansion, at the top of their priority list. This will impact not only hiring but also, increasingly, the release of excess office space onto the market. We have noted a significant uptick in ‘grey space’ with a number of occupiers very willing to talk to those with active requirements. With much of this tenant space being of good quality, competition for tenants is increasing and is likely to have a dampening effect on City rents.
“The shift in sentiment has been rapid and it is too early to see what impact it might have on construction levels. There are undoubtedly some difficult decisions for developers over the coming months as to whether to start new sites or continue schemes that could be put on hold.”