Sentiment is shifting, says Drivers Jonas Deloitte
The recovery in development activity across the market for London office space has been sustained during the past six months, says Drivers Jonas Deloitte, although delivery of new space remains low compared with historical levels. “The question now is whether the market needs this new space, given the weakening economic environment,” notes partner and head of research Anthony Duggan.
The firm has seen a significant weakening in sentiment in recent months, with corporates becoming more defensive and putting cost control at the top of their priorities, rather than expansion. Drivers Jonas Deloitte has noted a significant rise in ‘grey space’, with a number of occupiers very willing to talk to those with active requirements, says Duggan, and as much of this space is of good quality, competition for tenants is increasing and is likely to have a dampening effect on City rents, he adds.
“There are undoubtedly some difficult decisions for developers over the coming months as to whether to start new sites or continue schemes that could be put on hold,” Duggan adds.
The new Winter 2011 Cranes Survey from Drivers Jonas Deloitte finds that there were 22 new starts in the six months covered by the report, compared with 25 in the previous half-year. However, while this is only a small reduction, the volume of space started during the past six months has dropped by 66% and the average scheme size has fallen from 195,000 sq ft to 72,000 sq ft. The firm says this is not surprising, given the size of the towers recorded as new starts when the survey was carried out in early summer. The total amount of office space under construction in the capital is up 12% at 7.2m sq ft compared with the previous survey, and well above the 2.7m sq ft reported a year earlier.
The survey notes that developers tend to be preferring comprehensive refurbishments rather than demolitions and new builds, with 64% of all new starts classed as refurbishments. The firm notes that this strategy can often be cheaper and quicker to complete.
In the City, the survey records seven new starts with a total of 3.1m sq ft under construction – up 11% from the previous six months. Of this total, 362,000 sq ft is being refurbished across five sites, it notes. The survey also points out that delivery of office space in the City in 2012 will be the lowest for a decade at 443,000 sq ft, and that 2013 will be even lower at just 355,000 sq ft as things stand – although there is still time for this figure to rise.
In the West End, there were eight new starts in the survey totalling 2.3m sq ft under construction. Of this total, 1.1m sq ft is due for delivery in 2012 across 12 developments, five of which are new builds. Drivers Jonas Deloitte says the survey suggests there will be several new starts next year for delivery in 2014. The shortage of Grade A space in the West End is becoming increasingly acute and Stephen Peers, partner and head of West End agency and national leasing, says ‘developers should be looking at construction to capitalise on a potential under-provision’. He notes that in contrast to the caution being demonstrated by City occupiers, the backbone of tenant demand in the West End looks far more solid thanks to a diverse range of occupiers, led by the TMT sector, which he expects to remain active.
The Midtown market recorded four new starts totalling 178,000 sq ft in the survey. Although the number of new starts is lower compared with the previous survey, the volume of floorspace under construction is up threefold on the level seen in 2010, the firm notes, with a total of 10 schemes currently underway set to deliver 643,000 sq ft during the next two years.
There were two new starts recorded in the Southwark market – 55,000 sq ft of new space and a refurbishment of 17,000 sq ft of expansion space. The Paddington and E14/Docklands markets remain quiet – there has been no office construction activity starting for more than a year in these areas.
