Look at the cranes 8th November 2013

The London office development market remains at a four-year high with 9.7m sq ft across 71 schemes now under construction, according to Deloitte Real Estate’s latest London Office Crane Survey.

The survey describes improving sentiment in London’s commercial office development market with 28 new starts recorded across the capital, and 6.6 million sq ft expected to be delivered next year. Importantly over 2m sq ft is already leased to tenants prior to construction completion, showing encouraging occupier confidence.

Anthony Duggan, head of research at Deloitte Real Estate, said: “2014 is currently set to deliver the largest amount of space into the Central London office market for 10 years. This is good news for the increasing number of companies looking for office space in a market where supply is reducing and shortages are appearing. “However, we do not expect a significant oversupply of office space next year as there are strong indications that tenants will commit to this space during construction and so the amount being delivered into the market and available to lease will continue to reduce. Indeed, less than half the space completed over the last six months was available to let, with the rest let by tenants pre-completion.”

Construction in the City has reached a five-year high with over 5m sq ft now being developed across 23 schemes. Nine new starts are recorded in this survey, totalling 1.3m sq ft. This increase in construction is a direct result of improving sentiment in the City with developer confidence buoyed by reducing levels of Grade A space.

Available space in the City is now at a five-year low having fallen from four million sq ft to just 1.4m. This comes at a time when City of London Grade A take-up for 2013 is expected to hit its highest level for three years. Grade A shortages will therefore appear over the next 18-24 months further driving rental growth in the City market.

In contrast the West End has seen total construction activity fall in this report, down 36 per cent to 1.5m sq ft. This market has seen a high level of completions with 1.2m sq ft delivered since the last survey (six months ago). However, only a third of this total is available to let due to active leasing activity on schemes while under construction from a mix of financial, professional and technology, media & telecommunications (TMT) occupiers. Interestingly, the focus of the new starts in the West End office market has shifted from submarkets, such as North of Oxford Street and Victoria, back towards to Mayfair and St James’s. Forty-two per cent of West End construction is now in these markets as opposed to just 23% 12 months ago.

The survey explores this trend for ‘super-prime space’, identifying the average size of a scheme being built as small, but it is catering for the return of hedge funds, private equity and wealth management companies looking for high-end space commanding rents in excess of £120 per sq ft.

In Midtown, the survey records a 47% rise in construction with eight new starts and 1.1m sq ft now underway. Developers are building here due to low availability (six year low), and strong tenant demand from legal and media companies as well as the increasingly imminent arrival of Crossrail.

Activity in King’s Cross and the Southbank markets is also strong – reflecting the robust demand from ‘footloose’ TMT tenants for office space in these locations.

Duggan concludes: “This latest report reflects the improving confidence being seen from both office occupiers and developers. Leasing activity of new space has increased and construction remains active with 28 new schemes on site this survey. “We are now seeing rents move forward again following a pause over the last couple of years and this prospect, along with continued appetite from investors for prime stock and the improving economic outlook, will encourage further development starts over the next six to 12 months.