Deloitte's London Office Crane Survey: Refurbs powering London office market as new construction starts dip

• Refurbishment new starts exceed 2.5 million sq. ft. - outperforming new office construction starts for the eighth consecutive survey; 
• The total volume of new starts, 4.2 million sq. ft, has fallen 18% from the record high of the previous survey, but is still well above the 10-year average of 3.3 million sq. ft;
• New start volumes have exceeded 4.0 million sq. ft. for three consecutive editions, the first time this has occurred; 
• The volume of offices under construction is at a record high of 16.4 million sq. ft. across 127 schemes.

The Summer 2024 edition of the Deloitte London Office Crane Survey¹ indicated that developers are turning to refurbishments in the face of economic uncertainty, with new construction starts falling.

The latest crane survey recorded 4.2 million sq. ft. breaking ground across 42 schemes. This represents an 18% decrease when compared with the previous survey six months prior, which had reported the highest volume of new starts on record. Despite this dip, the volume of new starts in this survey is well above the 10-year average of 3.3 million sq. ft.

Sophie Allan, director in real assets advisory at Deloitte, said: “While there has been a drop in new starts from our last crane survey, development activity remains well above the 10-year average. The desire for premium office space as well as the implementation of energy standards has powered projects centred on modernising outdated premises. This inclination to opt for refurbishment is a trend we foresee enduring over the next decade.” 

Completion and construction rates 

As anticipated in the previous crane survey, 2023 delivered the second highest annual completion volume on record of 7.5 million sq. ft.

So far in 2024, 1.8 million sq. ft. of new office space has been delivered to market. Based on developer indications expect a further 6.9 million sq. ft. is expected to complete this year. However, factoring in the recent trend where actual delivery has ranged between 45% to 75% of the preceding projections, 2024 is more likely to deliver a total completion volume between 5-7 million sq. ft. 

The volume of office space under construction is at an all-time high of 16.4 million sq. ft. across 127 schemes. Notably, the 12.2 million sq. ft. of ongoing construction across 85 schemes carried over from the previous surveys makes up 74% of this volume.

Margaret Doyle, partner and chief insights officer for financial services and real estate at Deloitte, said: “Uncertainty created by economic headwinds such as high interest and inflation rates and supply chain disruptions has delayed schemes, thereby increasing the volume of office space under construction.

“In response to these macro factors, we are seeing developers trying to de-risk schemes, for example, breaking up projects into discrete chunks, and delaying instructing contractors until a substantial portion of the scheme has been let. These defensive actions by developers appear to be behind the declines in both new start and completion volumes seen in this survey and may presage a medium to long-term supply squeeze.” 

The West End lights up again

The West End has once again gained an edge over the City of London, as the most active submarket in terms of new construction activity due to three large new starts totalling 945,000 sq. ft.  In recent surveys, that accolade has shifted between the two areas, despite the City’s longer-term position at the top of construction volumes.

Doyle added: “Aligning with the refurbishment trend we’ve identified in this survey, we know that the West End neighbourhoods of Mayfair and St James's lend themselves well to refurbishments, with their high proportion of 'listed' buildings. Both locations have shown notable resilience despite construction challenges brought on by the pandemic and changing building regulations, and developers continue to deliver high quality, desirable Grade A product to market.”

Among the other submarkets, only Midtown - the area encompassing Farringdon and Holborn - has recorded an increase in activity this survey, reporting a near 12% uptick.

Environmental, social and governance 

The total volume of refurbishment starts has surpassed the new build start volume over each of the last eight surveys. This period has seen an average refurbishment start volume of 2.3 million sq. ft. and an average new-build start volume of 1.2 million sq. ft. Compared to the ten prior surveys this marks an average rise of one million sq. ft. in refurbishments and an almost 37% decline in new-builds.

In the developers’ survey, respondents again rated limiting total Energy Use Intensity (EUI) as the most challenging net zero requirement to implement.

Philip Parnell, partner and real estate valuation lead at Deloitte, said: “Notwithstanding the challenging economic backdrop, the ESG agenda is stimulating the need for renewal. Through a combination of tightening planning policy and ever-increasing focus on moving towards achieving net zero, it is fascinating to see the continued trend of increasing refurbishment activity. This underlines our previous assertion that investors should be conscious of an increase in the risk of stranded assets where assets do not meet occupiers’ ESG expectations, with the inevitable risk of value erosion.”

Additional figures from the research showed:

• Six million sq. ft., which represents 37% of the total volume under construction in Central London, has been pre-let as of 31 March 2024.
• The financial services sector has pre-let the largest proportion of office space in ongoing construction projects.