London office construction market shifts to refurbishment
Total office construction across central London is at an eight-year high, but the market is now turning towards refurbishment rather than new build.
The latest London Office Crane Survey from Deloitte shows that there is now 14.8 million sq ft of office space under development, a rise of 4% over the previous survey six months ago, and 41% above the 10-year average of 9.7 million sq ft.
However, the construction periods on some schemes have been extended, with completion dates slipping by an average of one quarter. Close to one million square feet of space that had originally been due to complete by the end of Q3 2016 is still under construction.
Moreover, new activity is down 42% from the record high number of starts recorded in the summer 2016 survey. 40 new office developments have started in the past six months, adding 2.8 million sq ft to the pipeline. That compares with 4.8 million sq ft, across 51 schemes in the summer 2016 survey.
The latest new starts are fuelled by refurbishment projects, which are typical at the end of a long period of strong development, Deloitte says. In total, 28 refurbishment schemes account for 70% by volume of the new space started, providing a boost to the delivery of new office space in 2017. However, refurbishments tend to be smaller than new builds; Deloitte has recorded a 26% fall in the average size of schemes started, from 95,000 sq ft to 70,000 sq ft over the past six months.
Deloitte continues to forecast rising delivery in 2017 and 2018, but the peak has shifted to 2019-20.
“Despite an increase in the overall volume of construction, the pace of development activity has slowed compared with our last survey six months ago” said Chris Lewis, head of occupier advisory at Deloitte Real Estate. “New construction activity is down 42% from the previous survey, which recorded the highest number and volume in our survey history.
“Interestingly, it is major office refurbishments, rather than new-builds, that are fuelling this latest wave of construction. Refurbishments account for 28 out of the 40 new starts and highlight the opportunity that developers can deliver into a market that still has low levels of available office space.”
As usual, the greatest number of new starts was in the City. Construction began on 14 new schemes, totalling 1.1 million sq ft, and increases the City’s development pipeline to 8.8 million sq ft. In contrast, the West End and Midtown submarkets have seen construction activity decrease by 25% and 20% respectively over the past six months. This is largely as a result of a number of projects completing and smaller schemes starting. For the first time, the crane survey also tracks construction activity in three additional locations: Vauxhall-Nine Elms-Battersea, White City and Stratford. These three areas have 11 office schemes under construction and will deliver 2.9 million sq ft to the market, 65% of which is already pre-let.
Will Matthews, head of Insight at Deloitte Real Estate, said: “2015 and 2016 have been the most active years for new developments in two decades, with 148 schemes totalling 15 million sq ft starting construction. Many of these schemes are now nearing completion, meaning that almost 7.5 million sq ft of offices are due to be delivered between now and mid-2017.
“The expected increase in completions, combined with macroeconomic uncertainty is leading some developers to defer the start-date of future speculative schemes. Our pipeline is showing the bulk of future delivery is now likely in 2019 and 2020. Nevertheless, demolition levels have increased by 12% over the six months, indicating that other developers are continuing to press ahead.”
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This article was published on 15 Nov 2016 (last updated on 15 Nov 2016).