COMMENT One real estate trend that has continued largely unabated over the past 18 months is the delivery of office-led development in London.
In a typical economic downturn we would expect the development pipeline to slow while finance is withdrawn or restructured; the Covid-19 period has been atypical.
Most discussions about the future of London offices have focused on the potential changes to working practices, rather than the wider economic situation and occupier failure. Even in the face of these concerns, there seems to be a consistent view among investors and developers that London offices have a solid future, and that therefore they will continue to bring schemes forward.
There is good reason for this optimism: central London active demand currently stands at 10m sq ft, up by 17% compared with the end of 2019, with space under offer at 3.1m sq ft, also up on 2019.
Sustainability to the fore
The type of space being delivered is slowly changing. Starting before Covid-19, and now accelerated by it, we are seeing more emphasis being put on sustainability-led schemes.
However, it is yet to really come through in this or even next year’s figures, which still show projects planned perhaps back in the mid-2010s. Approximately 44% of this year’s new starts are known to be aiming to achieve a BREEAM rating of Very Good or above, and at present only 34% of schemes scheduled for delivery over the next five years are currently targeting a BREEAM rating exceeding Very Good.
Looking at the breakdown of delivery of the top ratings between the City and West End markets – and acknowledging again that it takes some time for the figures to reflect changes in approach – so far only 13% of the pipeline for the West End in the next five years is known to be targeting an Excellent or Outstanding BREEAM rating. This is in comparison with the City, where 50% of the pipeline is currently known to be aiming for the same ratings.
When you look at this year’s new starts, it is clear that among prelet space occupiers have a strong preference for space with good sustainability credentials, with 82% of the schemes that have been prelet targeting a BREEAM rating of Very Good or above. This gives a good indication that future demand for this type of product will most likely be greater than supply, given the delivery figures above.
New vs old
There is potentially another issue at play when it comes to satisfying occupier demand for this type of space and the balance between what occupiers want in terms of sustainability credentials and other considerations.
Of the total pipeline over the next five years, two-thirds consists of new developments, and around 67% of the schemes targeting BREAAM Outstanding, Excellent or Very Good ratings between 2021 and 2025 are also new development – as opposed to extensive refurbishment projects – largely because local authorities are able to demand higher standards through their planning requirements on new scheme applications.
However, as my colleague Chris Cummings, head of Savills Earth, says: “Investors and occupiers are increasingly looking to refurbished properties over new-build, amid growing awareness of the embodied carbon impact of construction. New development remains necessary but, in order to compete, these buildings must demonstrate that the improved efficiency they bring delivers a whole-life carbon benefit, when compared with keeping an existing building in use.”
There are obviously challenges for refurbished space when, alongside sustainability, occupiers are looking for top-quality flexible spaces which also prioritise wellbeing. Buildings that are highly ventilated and allow occupants to monitor and control internal environmental conditions through apps, offer top-quality end-of-journey facilities for cyclists and runners, and have access to communal or private outside space are continuing to dominate the demands of the discerning occupier – amenities that do not necessarily fit easily into refurbished buildings.
Striking a balance
A number of new schemes are coming forward which aim to strike the right balance between amenity and sustainability, and we are seeing investors and developers making this a key requirement in their appetite for new sites, but an equilibrium has not quite been struck yet, and will take some time to come through in the numbers.
With more businesses – including investors and occupiers – setting their own net-zero carbon targets and considering their wider sustainability objectives (and we could see regulatory measures to speed up a change in behaviour imminently from the forthcoming COP26 climate change summit), the incentives to consider how these objectives can be achieved through their real estate decisions are only going to increase, further driving competition for the most sustainable spaces in the capital.
As we have seen, investors and developers are beginning to respond, but in order to provide everything that tenants want, both in terms of sustainability performance and high-quality space, they need to increase delivery and continue to listen, respond and work in partnership with occupiers to understand their needs.
Victoria Bajela is an associate director in Savills’ commercial research team
