London to see surge in new office starts in 2022
The return to the office for many companies following the covid-19 pandemic has led to a rise in office construction projections, especially in London. The capital is set to see a rise in office project starts over the next six months, due to increased demand and the need to improve building energy performance.
Refurbishments are on the rise
According to the latest London Office Crane survey report from Deloitte, there are currently 2.7 million square feet of planned office buildings in the demolition phase and scheduled to start by the beginning of October in London.
However, there is a decline in new office builds, with projects focusing instead on refurbishments. According to the survey, this is due to mounting pressure to recycle and re-use existing space.
In fact, the first quarter of 2021 saw a dramatic decline in new build projects in central London compared to previous years. Despite this, office construction in the capital has increased by 4%, keeping it above the 10-year average. A total of 36 schemes were started in London in the last six months with 31 of these being comprehensive refurbishments.
“Increased new starts – especially of refurbishments – reflects anticipated renewal of existing stock to provide sustainable and quality space now strongly demanded by occupiers,” said Mike Cracknell, director of real estate at Deloitte.
He continued to say that it is likely the long-term outlook will continue to look strong as property owners and developers continue to focus on upgrading building performance.
Currently, it is expected that completions in 2022 will reach at least 7 million square feet, which will be the highest volume of completions seen since 2003.
Mr Cracknell said: “A raft of delays, partly driven by supply chain disruption and labour shortages, contributed to a lag for developments to complete. Despite this, the market is displaying resilience with appetite amongst investors remaining strong. This coupled with occupier demand is contributing to confidence in the city.”
Developers seem to agree with this sentiment, with the survey finding that two-thirds are intending to increase their pipelines over the next six months.
Energy efficiency legislation driving construction
The Minimum Energy Efficiency legislation is also set to result in an increase in projects, with standards set to be tightened so that minimum compliance levels move from Grade E to Grade B by 2030. Currently, it is estimated that 80% of London office stock will need to be upgraded as a result of the legislation, equating to around 15 million square feet a year.
Philip Parnell, real estate valuation and ESG (environmental, social and governance) lead at Deloitte, said: “The ESG agenda is far from new. But increasing levels of corporate reporting transparency, stakeholder pressure – including that from occupiers – and more stringent environmental standards, are undoubtedly driving investor and developer focus. We can expect to see continued growth in refurbishment activity to address value erosion caused by accelerating obsolescence and occupier choice.
“Appreciation of the embodied carbon within existing structures is growing. Brand new development will of course continue to happen, but the drivers and increasing preference to refurbish, re-use and recycle are clear.”
Leasing in London remains strong
Despite the rise of working from home following the pandemic, pre-letting activity in the capital hasn’t really changed from past surveys. The latest report has found that just under a third of offices under construction are committed to by a tenant.
It seems that demand for office leases is picking up again, with 65% of developers reporting that demand in London was “a little better” while 14% say it is “much better” than it was six months ago. Overall, developers are optimistic about the leasing market.
Currently, it’s technology, media and telecommunications companies that are making up a large portion of the demand for offices in central London. The industry accounts for 28% of pre-let space currently under construction. The financial services sector is up next (24%) while the legal sector has taken up 20% of pre-let office spaces currently under construction.