Developers in the London office market are continuing to focus on refurbishments over fresh schemes, as the volume of space in new starts across both project types falls sharply from a recent record.
The summer edition of Deloitte’s London Office Crane Survey tracked work starting on 4.2m sq ft of space across 42 schemes, down by almost a fifth on the all-time high from the last survey six months ago. This now marks the eighth consecutive survey in which the volume of refurbishment projects (2.8m sq ft) has outpaced that of new-builds (1.4m sq ft).
Sophie Allan, director of real assets advisory at Deloitte, said: “While there has been a drop in new starts from our last crane survey, development activity remains well above the 10-year average. The desire for premium office space, as well as the implementation of energy standards, has powered projects centred on modernising outdated premises. This inclination to opt for refurbishment is a trend we foresee enduring over the next decade.”
So far this year, 1.8m sq ft of new office space has been delivered to market, with a further 6.9m sq ft expected to complete over the remainder, based on developers’ own estimations. However, Deloitte noted that actual delivery tends to range between 45% and 75% of projections, meaning that 2024 is more likely to deliver a completion volume of 5m-7m sq ft.
The volume of office space under construction stands at an all-time high of 16.4m sq ft across 127 schemes. Three-quarters of that is accounted for by 12.2m sq ft of ongoing construction across 85 projects carried over from previous surveys.
Margaret Doyle, partner and chief insights officer for financial services and real estate at Deloitte, said: “Uncertainty created by economic headwinds, such as high interest and inflation rates, and supply chain disruptions has delayed schemes, thereby increasing the volume of office space under construction.
“In response to these macro factors, we are seeing developers trying to de-risk schemes – for example, by breaking up projects into discrete chunks and delaying the instruction of contractors until a substantial portion of the scheme has been let. These defensive actions by developers appear to be behind the declines in both new start and completion volumes seen in this survey and may presage a medium to long-term supply squeeze.”
Midtown was the sole submarket to record an increase in activity in this survey, up by 12%. The West End was the most active submarket for new construction activity.
“We know that the West End neighbourhoods of Mayfair and St James’s lend themselves well to refurbishments, with their high proportion of listed buildings,” Doyle said. “Both locations have shown notable resilience despite construction challenges brought on by the pandemic and changing building regulations, and developers continue to deliver high-quality, desirable grade-A product to market.”
Developers responding to the survey rated the limiting of total energy use intensity as the most challenging net zero requirement to implement.
Philip Parnell, partner and real estate valuation lead at Deloitte, said: “Notwithstanding the challenging economic backdrop, the ESG agenda is stimulating the need for renewal. Through a combination of tightening planning policy and ever-increasing focus on moving towards achieving net zero, it is fascinating to see the continued trend of increasing refurbishment activity.
“This underlines our previous assertion that investors should be conscious of an increase in the risk of stranded assets where assets do not meet occupiers’ ESG expectations, with the inevitable risk of value erosion.”
Photo © Syaibatul Hamdi/Pixabay
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