The UK’s capital has seen the highest volume of new office starts on record, with 5.1 million square feet of new construction starting across 43 schemes, according to Deloitte’s Winter 2023 London Office Crane Survey.

It is the highest volume of new starts since the Crane Survey was extended to track new construction activity across the seven central London submarkets in the summer of 2005. At almost 16% higher than the volume recorded in the last survey and with seven fewer schemes starting, the average new scheme size rose to 119,000 square feet, from 88,000 square feet.

Refurbishment starts have broken records for the second consecutive survey, comprising 34 schemes covering 3.3 million square feet.

Deloitte points out that the increase in refurbishments has again been driven by the anticipated tightening of Minimum Energy Efficiency Standard regulations, coupled with demand for premium-grade office space in line with tenants’ own sustainability commitments and aspirations.

Sophie Allan, director in real assets advisory at Deloitte, said in a statement: “New builds have roared back from their post-pandemic nadir, which has likely been driven by large prelets and growing developer confidence in the demand for premium office space. Meanwhile, refurbishments continue to play a critical role in London’s development pipeline as the increasing need to modernise office space to avoid obsolescence grows. The future will see further skyscrapers added to the City’s skyline, with three large developments recently obtaining planning permission.”

The survey period has seen the start of five large schemes, of 300,000 square feet and above. Their collective volume represents 40% of the total new start volume, Deloitte says. The period also recorded approximately 4 million square feet of completed office space across 45 schemes in central London. Sixty-one schemes with a total volume of approximately 6 million square feet are now expected to complete in the Summer 2024 survey period.

As of 30 September, there were 124 schemes under construction across the central London market, with a total volume of 15.7 million square feet. This represents a 9% increase on the total construction volume of 14.4 million square feet recorded in the last survey.

Margaret Doyle, partner and chief insights officer for financial services and real estate at Deloitte, said in a statement: “As predicted in last winter’s survey, the construction industry is now catching up following the pandemic. Demand for premium office space is still fuelling rising construction new starts this year, but supply chain issues and other construction delays may continue to affect completion dates. Interestingly, developers we have spoken to seem to be more concerned about the supply of, rather than demand for, premium space. With the increased volume of new starts and completions reported this year, there is a healthy amount of prime office stock on its way to the market.

“Despite this, the macro-environment for the London office market remains challenging. The current economic and geopolitical backdrop implies significant uncertainty about the future path of energy prices, inflation and interest rates. But for now, developers seem prepared to bet that, if they build premium office space, the metropolis will continue to attract occupiers.”

The survey finds the City of London has bounced back, with 2.4 million square feet of office space starting across 16 schemes. This includes two large new build starts and the largest refurbishment start of the survey. These three schemes represent almost 1.4 million square feet of new starts. They are in line with the City’s historical trend of hosting large-scale new builds of over 500,000 square feet with sizeable floor plates.

Doyle said: “The leasing market is seeing activity pick up as more occupiers are starting to firm up their working patterns. The City could see a further uptick in activity as the appetite for premium office space from certain sectors – such as professional and financial services – applies positive demand pressure. This means that developers are further incentivised to upgrade and build new offices.”

New starts in the West End have declined by 13% since the last survey to 1.1 million square feet. This is partly due to a number of developments completing during this period, as it continues to show strong levels of activity. Southbank has recorded an increase of 19% this survey period, largely driven by a 385,000-square-foot refurbishment.

It is such data that led GPE to talk about a supply drought in its favoured West End market last week, and is causing Landsec to target West End and Southwark offices in particular.

Developers in the survey anticipate that they will achieve operational net zero across their portfolios by 2040 but highlighted the cost of construction as the biggest challenge to achieving net zero. They also listed the limits on total Energy Use Intensity as the most challenging requirement to achieve, when asked about the requirements for net zero from the UK Green Building Council.

Philip Parnell, partner and real estate valuation lead at Deloitte, said in the report: “Occupier focus on premium space, coupled with addressing the anticipated MEES deadline and drive to net zero, is continuing to provide a strong stimulus to refurbishment activity. This is a trend that is countering the backdrop of an otherwise challenging macro-economic environment.”

The figures found that 5.8 million square feet, or 37% of the total volume under construction in central London, has been prelet as of the end of September 2023. Legal occupiers have taken 30% of this volume, making it the most active tenant sector.

Financial services saw the biggest increase (35%) in prelet market share this survey period

Deloitte says developers expect a relatively stable London office development pipeline.
 
The survey measures the volume of office development taking place across central London. Conducted twice a year, the London Office Crane Survey analysed office construction data over the six months from 1 April 2023 to 30 September 2023. The seven sub-markets are: The City, West End, Midtown, Southbank, Docklands, King's Cross and Paddington.

The first Crane Survey in London, The West End Crane Survey, was published in 1996 by Driver Jonas (later acquired by Deloitte). It is seen as a barometer of developer sentiment and future office supply, measuring volume and impact of office development taking place across central London and analysing the pipeline over the next four years.