Office construction in London has hit heights not seen since prior to the financial crisis, as total new stock under construction increased 4% in twelve months time to 14.8 million square feet. The City continues to attract the largest stock of new office buildings, at almost 70% of total office construction projects. And while financial services firms continue to be the keenest to let new stock, vacancy rates across total central London stock are up slight to 4.8% – with further demand uncertainty from Brexit and rates rises on the cards.
Following a period of subdued growth in the wake of the 2008 financial crisis, crane activity across London has again picked up as new office buildings rise from the ground. In Deloitte’s latest ‘Crane Survey’, covering the last six months of 2016, the firm maps the current office construction schemes across central London, as well as considers the future outlook for development in the space.
In total, more than 14.8 million square feet of new space is under construction in central London, up 4% on the previous survey and more than 53% up on the ten-year average of 9.7 million square feet. Construction activity, following lows as fallout from the financial crisis which saw new offices construction fall to just over 3 million square feet, has rebounded to levels last seen in the 2002-2003 period and just prior to the crisis.
The firm notes however that the current high level of activity masks two factors, which paint a slowdown in the market. The first is that the current period contains around 1 million square meters in projects whose completion was set for the period itself, and the second is that new projects have decreased significantly (43%) on Q1 2016.
In terms of project location, the City, home to most of the biggest firms in the capital, continues to draw the lion’s share of new office space, topping 8.8 million square feet. The West End and Midtown come equal in second place, with 1.7 million square feet apiece. Paddington shows the lowest construction volume of the submarkets considered.
The research also considered the respective change in office space under construction between Q1 and Q2 2016, as well as changes in available and let square feet of the stock under construction. The analysis finds that the City again comes in on top, with almost 8.8 million square feet, up 7% on the previous survey, while demand for the space has increased slight, with already let space up 15%. The West End and Midtown have seen considerable contractions in the construction of new space, at -25% and -20% respectively – as a number of schemes finish and lower number of new starts add to the total.
The rapid growth in Southbank, where new construction is up 664%, are largely the result of the 1 and 2 Southbank Place. The Docklands and Paddington too have seen considerable increases in activity, up 39% and 65% respectively, following one new start each.
According to the accounting and consulting firm, demand for new space continues to be sustained, with let space under construction up 2% on the previous survey and 44% on a year earlier. The research finds that firms across the city are still actively seeking out more, or more functional space; 41% are consolidating various locations into more space overall and 43% are simply taking more space.
In terms of the segment most actively picking up new space, financial services takes the number one spot at 42% of total under construction space (2.5 million square feet) – international banks account for the largest share at 1.8 million square feet. The TMT sector comes in second spot, with 33% of the total space, followed by corporates at 10% and legal firms at 9%. Professional services firms, insurance and government are all on 2% of the total pie apiece.
The research notes however, that across London there has been a slowdown in tenant demand for existing space, which is further affected by the large volume of new stock to the market. Total vacancy rates have risen slightly, although from record lows, from 3.9% at the start of 2016 to 4.8% in the latest survey. The effects of key market factors such as Brexit, particularly on key financial services firms dependent on passporting, and cost increases following impending business rates revaluation, remain to be seen.