Record construction of London office space, but supply shortfall remains

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Commercial Property LondonDemand for office space in London continues to overwhelm its availability and in spite of record levels of construction, according to two new reports. The latest CBRE Monthly Index claims that rents in Central London’s booming office market grew by 10.3 percent in the year to October 2015, the first time annual growth has hit double digits since April 2008. Despite rapidly rising rents, take-up of offices in Central London continues to outpace the 10 year average. The capital saw 1.1 percent growth in October, with 3.6m sq ft of space snapped up by businesses in the third quarter of 2015, with a further 3.8m sq ft currently under offer and expected to complete before the end of the year. Change could be on the way however as the latest biannnual London crane survey from Deloitte claims that the amount of office space being built in central London has risen by a fifth in six months, the highest level  for seven years.

Office rents aren’t just rising rapidly in London. Rental values in the office sector grew by 1 percent across the whole of the UK last month, only the third time rents have grown this quickly since the financial crisis.

This latest data echoes that of research published earlier this month which warned of less than one year’s supply of office space in the Capital is leading many occupiers to search further afield to meet their property requirements.

Capital values are also growing fastest in the London office market, at 1 percent in October, some way ahead of the 0.6 percent for offices outside London, and twice as fast as the 0.5 percent growth seen across all commercial property. Together, the rising rents and capital values in the UK office market are giving investors total monthly returns of 1.2 percent.

“London’s office market has been heating up for some time now, but there is still strong business demand across the capital,” said Kevin McCauley, CBRE’s Head of Central London Research. “Rental value growth has not been this sustained since before the financial crisis, and together with rapidly rising property values, landlords and investors are experiencing a booming market.”

According to the Deloitte study, around 11.1m square feet of commercial space was under construction in the six months to the end of September, up around 18 per cent on the previous period. The study confirms London’s eastward shift with half of this new development in the City and surrounding areas, while just under a quarter is in the West End.

The authors of the report don’t think that this will alleviate rent increases. The study confirms that  the amount of office space in London available to rent remains at its lowest level in at least 14 years. So desperate are occupiers for space that a third of the space being built has already been let. The report also claims that there has been a 25 per cent jump in the amount of office space being demolished. Of the space under construction, 44 per cent has been leased by telecoms, media or technology companies, compared with 27 per cent for financial companies.