London office market 17th May 2013

Office construction in central London has hit a four-year high, according to the latest London Crane Survey from Deloitte Real Estate. Commercial development is up 8% over the last six months with 9.7m sq ft of office space currently under construction.

Construction activity across London has now more than trebled since activity reached a nadir in mid-2010. Tenants have also been agreeing more leases on new space, the survey found. In Q1 of this year, 335 of space under construction was pre-let – the equivalent to six Shards, a sharp contrast to 2011 when only 1% was pre-let, all of which highlights the strength of the capital’s economy.

Cranes continue to dominate the City skyline with nearly 4.5m sq ft under construction, up 10% since the last survey in November last year. Leasing activity on the space under construction has almost doubled from six months ago. 2012 saw the lowest level of office completions in the City for over 25 years. This unprecedented low level of new supply has allowed the market balance to readjust back in favour of the landlord, as the supply of existing space begins to reduce.

The consequence of the lowest levels of Grade A space for five years is that occupiers are starting to find themselves in competition for reducing tranches of space. Developers in the West End were fast to react to improving conditions following the low level of completions in 2011, and as a result this year will see 1.6m sq ft complete, the highest level for seven years.

Despite Grade A availability levels being relatively high, the survey reports that occupier sentiment is improving and appropriately specified office space is being built in the right locations. Mayfair is set to see the largest influx of space for several years with 400,000 sq ft delivered this year but, according to the survey, the primary focus for new development is the areas of the West End outside Mayfair. North of Oxford Street and Victoria particularly are emerging as attractive locations with developer confidence driving construction activity and occupier demand driving rental rises of 74% and 51% respectively since 2009.

The survey also shows that there is real momentum in some of London’s smaller office submarkets. King’s Cross has seen the biggest increase in new floorspace, up 68% since the last survey. Attracted by Crossrail and infrastructure investment, Midtown now has 722,000 sq ft under construction, Southbank 982,000 sq ft, and King’s Cross 800,000 sq ft. Anthony Duggan, partner and head of research at Deloitte Real Estate, said: “The increase in construction and leasing transactions recorded in the latest survey reflects the improving sentiment being felt in the London office market. Importantly, a number of the ‘bellwether’ vacant schemes across London are now transacting, reducing the ability of potential occupiers to sit back and wait for conditions to improve.

This is likely to add a little more urgency into the leasing market over the next few months. “This positive sentiment is backed up by the latest Deloitte CFO Survey which recorded a ‘striking broad-based’ rise in confidence among the UK’s largest businesses. We believe that, barring any further major economic shocks, this rising optimism is likely to translate into increasing tenant leasing activity later this year and further new developments breaking ground.”