Demand for London commercial space bodes well for construction

Facebook’s new Headquarters in King’s Cross. Image Source AHMM Architects

Brexit uncertainty has taken its toll on the level of new commercial construction in London as developers wait to see how the UK’s departure from the EU will impact the demand for office space in the capital. The latest Glenigan Index showed that the value of underlying office starts in London fell by 22% in the first eight months of 2018, compared to the period last year.

Yet, behind the slowdown, there are some encouraging signs that underlying demand remains healthy in the London commercial market, which in turn bodes for well for future levels of construction in the sector.

A recent survey from Savills showed that demand for central London office 'pre-lets' - which includes space due for development as well as under construction - is running at its highest level in the past decade. The agent reports 20 significant deals (involving space of over 50,000 sq ft) so far this year with a further eight pre-let deals in the pipeline. The best year previously was 2016, with 19 pre-lets.

Activity is rising as new tech and media firms - including recently Facebook and Linkedin - make long term commitments to new buildings, alongside traditional City occupiers such as finance and insurance companies.

Investment picking up

Meanwhile, investment in the City office market is picking up. After £582 million was invested in September across six deals, Savills notes that at the end of the third quarter over £2.5 billion of deals are under offer, compared with only £900 million at the same point in 2017. In what is being seen as a sign of the strength of the London office market, Citi Group recently put its tower at Canary Wharf on the market for £1.2 billion.

Signs of a lack of available stock in the City are also appearing, which augurs well for future construction. According to Savills, the value of stock available in the City at the end of the third quarter was just £1.5 billion, compared to over £6.5 billion at this point last year.

Major developers in the capital are also seeing an improving picture in the commercial market. British Land said recently that leasing activity in offices continued to be good and that 64% of its total development pipeline is now let or under offer, up from 55% in May.

Rising approvals

Tentative signs of recovery are also reflected in the latest figures from Glenigan for underlying planning approvals in the London offices sector. After falling during the past two years, the value of offices approvals in the capital rose by 51% to £629 million in the first eight months of 2018, compared to the period in 2017.

For now, rising demand for office space in the capital may be being met by refurbishments rather than major new commercial construction schemes. Glenigan Construction data points to various medium-sized office refurbs in central London where work is getting underway. Tenders have recently been returned on a £7 million office refurbishment in Middle Temple Lane, near Aldwych and a main contractor is due to be appointed before the end of this year. Meanwhile, work started last month on an £11 million refurbishment at 16-18 Finsbury Circus in the City for Alvarez & Marsal and is set to run for five months.