We have recently launched the summer instalment of the Deloitte Real Estate London Office Crane Survey. This is our flagship report (released bi-annually) which has been monitoring office construction activity in Central London for almost twenty years. The level of construction is widely used as a measure of economic activity - counting the number of cranes / construction sites across Central London is a relatively easy and accurate way to benchmark London’s economic health.
The latest results show that we are entering a new phase of construction, so the question arises as to who is going to be taking the new office space being developed? We believe that demand will continue from the telecommunications, media and technology sector, but also playing a key role will be the financial services sector. Financial services, insurance and business & professional services will account for a large share of the 300,000 new London jobs forecasted by 2020, and will continue to be an important driver of office demand.
The report highlights there is currently 9.2 million sq ft of office space being built across Central London, and shows a marginal fall in both the number of new construction starts and the total volume being developed over the last six months.
However growing demand from occupiers looking for new office space is putting a squeeze on the current level of available floorspace. At present there are just five buildings across the whole of Central London that can provide over 100,000 sq ft of space which is empty and ready to let.
In the short term the development pipeline does little to address the shortage of available offices with limited new stock completing over the next two years. As a result we expect occupiers to be competing for new space and rents are likely to rise over this time.
However, a combination of confidence amongst occupiers and developers and the ability to access finance has driven a rise in demolition levels. There is approximately 4.5 million sq ft under demolition or major strip out (to put that into some kind of perspective that is equivalent to roughly 7 and a half Shards) across Central London. It is our belief that the vast majority of this will translate into new construction starts over the next eighteen months.
The impact of this new phase of construction will be felt in two to three years’ time when the buildings currently being demolished begin to complete. The peak of the next development cycle could be as early as 2017; this is taking into account an “earliest” completion date scenario. However, our experience suggests that inevitably some buildings take slightly longer to complete, therefore we could foresee the peak delivery of space push out to 2018.
Regardless of a possible shift in the peak year of completion, the future cycle will deliver at around the long run occupational level. We therefore believe that the pipeline is manageable particularly when taking into account our view of rising potential demand.
The report analyses construction activity across all of the Central London sub markets, City, Docklands, King’s Cross, Midtown, Paddington, Southbank and the West End. Watch our video on our dedicated website www.deloitte.co.uk/cranesurvey to see an overview of each of the individual sub markets and our long term outlook for development, or to download the full report.
Ann is a Manager in the Deloitte real estate research team and has been working for Deloitte (previously Drivers Jonas) for ten years. She is an experienced and respected property analyst with a specialism in the London Office market. Data analysis, forecasting and bespoke client advice and strategy is a regular part of her role and she is the author of the widely recognized London Office Crane Survey research report.