Office demand prompts rise in level of London commercial construction

The FoundaryLondon has reached the highest level of commercial construction since 2008, with activity totalling £7.4 billion. According to JLL and Glenigan’s latest UK Commercial Construction Index the level of speculative office development under construction in Central London totalled 8.3 million sq ft at the end of Q1 2016, well ahead of the long term average (5 million sq ft) indicating that developers are continuing to respond to London’s burgeoning requirements for new office floor space. In the West End office market alone, construction started speculatively on nine schemes in the first quarter of this year totalling 596,997 sq ft; the highest level of commencements since the end of 2014. The largest starts were at Brunel, W2 at 241,000 sq ft, which is scheduled to complete in 2019 and The Foundry, W8, a refurbishment planned to complete by the end of this year totalling 110,000 sq ft.

“Generally, the construction industry remains cautious, however a recent fall in costs has offered some rebound for the commercial sector,” said Helen Gough, lead director of JLL’s Buildings & Construction team. “While total construction starts fell marginally this quarter, construction data on the whole remains volatile. Construction activity levels remain solid with London showing notable signs of resilience.”

Additional key highlights from JLL and Glenigan’s Q1 UK Commercial Construction Index include:

  • Commercial construction for the 12 months to the end of March fell to £23.0 billion, a fall of 7.2 percent on the previous quarter. The latest fall in overall construction activity mirrored the trend recorded for construction output with current Office of National Statistics (ONS) figures showing that construction output had fallen.
  • The survey highlights a continued willingness to commit to the core sectors of office, retail and industrial, which together continue to account for over half of commercial construction activity. The offices sector regained some momentum this quarter with total starts of £4.9 billion up 21.1 percent compared to the previous quarter.
  • On the regional level, activity in London remains resilient with total commercial construction up by almost 20 percent compared to the previous quarter and 9.4 percent compared to levels seen one year ago.
  • Elsewhere, Northern Ireland saw a 7.1 percent increase, albeit from the smallest base in the sample. Of the English regions, activity slowed particularly in Yorkshire & Humber. However this was mainly caused by an unusually strong Q1 2015 dropping out of the cumulative figures. During these three months £1.2billion of work started in Yorkshire & Humber alone, including work on the £600 million Victoria Gate retail project.

Jon Neale, lead director ofJLL’s UK Research team, added: “Construction activity is down on the annual and quarterly comparison, although activity levels are broadly in line with the long term trend over the last five years.

“Nevertheless, the pace of growth we have seen over last couple of years is beginning to moderate. This could be partly due to wider economic and political uncertainty but to some extent, growth will also be moderated by skills and resources shortages with workloads nearing capacity in some cases.”

Allan Wilén, economics director at Glenigan, concluded: “There are many reasons to remain optimistic – commercial construction activity in London and in many of the major regional cities remains solid. Major infrastructure projects such as Crossrail will also drive activity and with further projects in the pipeline there is positive momentum.

“New orders activity from the ONS also suggests there will be continued growth in construction activity this year with new construction orders for commercial property increasing by 62 percent (Q4 2015) from their lowest point in Q3 2012.”

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