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Circle panorama of urban city skyline, such as if they were taken with a fish-eye lens; Shutterstock ID 1039555912; purchase_order: Circles 2021

Will developers press ‘pause’ on new London offices?

In our Summer 2022 London Office Crane Survey, developers had become more cautious about their future office pipelines than in previous editions. Two-thirds of developers, when interviewed in early April hoped to continue to increase their pipelines in the next six months, but almost a quarter were planning to reduce them. In previous two surveys, none of the developers indicated an intention to decrease their office pipelines.

The anecdotal evidence indicates that new project starts are being hampered by the volatility in market prices of materials and, hence, an inability or difficulty to agree fixed price contacts. The long-term nature of construction means that many contractors are working on projects that they priced 12 or 18 months ago. Many are now facing thin or, more likely, negative margins, the impact of which may play out in the coming months. An inability to negotiate new projects will inevitably lead to delays and/or the need to consider risk sharing between asset owners and contractors.

A shift to ‘risk-off’ already seems to be underway. Our latest survey revealed a fall in the volume of new starts by almost one-third between October 2021 and March 2022, to 2.3m sq ft, falling short of the ten-year average of 2.8m sq ft. The larger the project, the greater the risk and therefore perhaps unsurprisingly, the new starts recorded in the crane survey data in this period are generally much smaller schemes both than the refurbs we recorded, and also smaller than typical new starts in the past.

One strategy to avoid the worst impact of the price increases is to follow the sustainable route of refurbishment. This is reflected in our survey results, showing the volume of new refurbishment starts rising, in the clearest sign yet that asset owners are acting as EPC deadlines loom. Refurbishments are both quicker to deliver and often more economical, while also presenting occupiers with an interesting sustainability proposition given the re-use of existing buildings. In contrast, only five new builds, equivalent to just 200,000 sq ft in total, broke ground between October 2021 and March 2022.

With a minimum EPC requirement of B by 2030, 80% of London office stock will need to be upgraded, an equivalent of 15m sq ft per annum, three times the annual average of completions (5m sq ft). It is imperative that those owners of offices with low EPC ratings spend the next few years on comprehensive refurbishment plans to avoid being left behind and unable to attract new tenants. With a lack of new build stock in the pipeline and a growing level of demand for best-in-class space, the refurbishment of London’s existing offices could do a lot to ease this supply/demand equation.

However, will the rising construction costs and recessionary conditions delay new office starts, including refurbishments?