November 25, 2021
The London Office Crane Survey Winter 2021 suggests dramatically improved confidence about London in the developments that are being undertaken in the office market. The survey, compiled by Deloitte, claims the volume of new starts has increased from 3.1 million to 3.4 million sq ft, above the long-term average of 2.4 million sq ft.
The number of new starts has fallen: this means that the average scheme size has increased by 28 percent to 122,339 sq ft, arguably a sign of greater risk appetite.
The proportion of new builds, vs refurbishments, while still below 50 percent of the total new start volume, has increased to 46 percent of the total, from 33 percent in the Winter 2020 Crane Survey. The uptick in new builds over the past three surveys has not disrupted the emerging trend towards refurbishments, which we believe to be a structural shift that is happening for sustainability reasons.
• The rise in new builds over the past three surveys may reflect a recovery in confidence after the initial shock of the COVID-19 pandemic, or decisions by developers to act on permissions already granted, given the increasing reluctance of planners to sanction demolition due to concerns around embodied carbon.
• The volume under construction has dropped to 13 million sq ft, above the long-term average of 10.7 million sq ft. The construction volumes have dropped in two consecutive surveys, despite rising new start volume due to the completions exceeding new starts in the Summer and Winter 2021 surveys.
• The proportion of volume under construction that is pre-let has fallen from 45 percent in the Winter 2020 Crane Survey to 31 percent in Winter 2021. This is well below the long-term average of 44 percent, and suggests a willingness by developers and investors to ‘look through’ current low physical occupancy rates due to the pandemic.
• The legal sector’s share of lettings has jumped to 17 percent, against a five-year average of 9 percent, reflecting one-off office moves. By contrast, the technology, media and telecom (TMT) sector’s dominance of lettings has fallen to 28 percent, from 40 percent in the Summer 2021 survey.
• Some developers are cautious about the market: we found three schemes where work has been delayed.
The confidence of developers is growing with regard to the future of work agenda, based on an increasing body of research and experience about the evolving impact of hybrid working on the demand for offices. Collaboration in the real estate sector to address climate change issues is also helping to alter approaches to development, refurbishment and asset management. Nonetheless, responding to the risks associated with ’stranded assets’ through obsolescence is less well-advanced.
“The office market must respond to a complex and evolving business environment”
“During this survey period, the government lifted its ‘work from home’ guidance,” explained Michael Cracknell, Director at Deloitte. “Underground numbers show a gradual return to the office, with September weekday ridership at 65 percent of pre-pandemic levels.
“Deloitte’s latest CFO survey highlighted a slowing in growth in Q3, with finance leaders navigating labour and supply shortages. Despite various headwinds, they are focused on investment and growth and at how reducing carbon emissions can be incorporated into corporate strategy.
“The office market must respond to a complex and evolving business environment, with uncertainties around hybrid working, and the net zero imperative. This is not easy with an asset that takes years to plan and build. Developers are keen to avoid the obsolescence of second-hand stock we now see.”
The survey provides a detailed insight and answers a number of key questions. What impact do the latest office construction figures have on supply levels? How concerned are developers about leasing demand? Are rising environmental standards accelerating the obsolescence of secondary stock?
This year marks the 25th anniversary of the launch of the Crane Survey – then covering just the West End. In the anniversary edition Deloitte analyses the past six months of activity and the results from our Developer and Construction Market surveys as well as looking to the future pipeline.
To celebrate this landmark, it also asked industry leaders to reflect on the past quarter-century and to take out their crystal balls for the next.