Office construction, which accounts for around a third of output in the £22.1 billion commercial construction sector, suffered deeply during the financial crisis. Amandeep Bahra from the Construction Products Association (CPA) looks at the re-emerging office sector.

Pg24 MARKET ANALYSIS3Growth in offices construction re-emerged in 2013, primarily due to the UK economy regaining health, with sustained recovery continuing to drive growth in the sector throughout 2014.

It is expected that 2015 will be characterised by demand significantly outpacing supply, resulting in escalating rental price growth, a broadening of construction activity and speculative investment across regional markets, all of which will contribute to healthy growth rates in the medium term. On the downside, however, the general election and mounting challenges in the global economy pose risks to activity in the commercial sector.

The UK economy wrapped up 2014 with GDP achieving growth of 2.6 per cent, the strongest increase since 2006. The recovery was largely underpinned by business investment and employment growth driving consumer spending. More recently, the UK economy has also benefited from falling oil prices that provided a well-timed boost to consumers and firms, by sharply reducing inflation and bringing about the long-awaited return to real wage growth.

On the back of a strong economic recovery, the offices sub-sector has experienced significant growth in line with the general economic upturn since the financial crisis. Although still 40 per cent below its pre-peak level recorded in 2007, offices construction grew 12.3 per cent in 2013 and 11.5 per cent in 2014 due to rising demand across the UK. After a period of subdued rental growth, rents have picked up once again in Central London and, whereas past years have witnessed construction activity in offices heavily skewed to London, activity is expected to spread more broadly across the UK over the long term.

Pg24 MARKET ANALYSIS2Several large projects were completed in London in 2014, including 20 Fenchurch Street (the Walkie-Talkie) and the Leadenhall building (the Cheesegrater), but new construction activity is expected to slow down. Some projects remain in the pipeline in the capital, with key new starts in the City such as the White Collar Factory, Old Street Yard.

Reflecting vastly improved sentiment and economic conditions, projects that have been long delayed are finally expected to start this year, including 60–70 St. Mary’s Axe (Can of Ham) and the Pinnacle. In addition, the £400 million scheme to redevelop BBC TV Centre will include over 500,000 sq ft of offices. Over the longer term, it is reported that there are 230 multi-use residential and office towers in the planning system for London.

However, much of the impetus for growth over the next couple of years will be driven by increasing activity in the regions. The latest findings from Knight Frank, Savills and JLL have all highlighted a strengthening of prime office rental interest in regional markets. With take-up levels at an all-time high, Grade A space is becoming increasingly scarce, which will add further upward pressure on rental prices and increase the scope for speculative investment in the sector. Limited levels of supply in the sector’s traditional capital region have pushed foreign investors’ interest outside of London. Indeed, a lack of high quality space appears most acute in Birmingham and Edinburgh.

In addition to Birmingham and Edinburgh, Manchester, Aberdeen and Bristol have also witnessed exceptional take-up, with the majority of expansion undertaken by the banking and finance, technology, and media  and telecommunications  (TMT) sectors.

Pg24 MARKET ANALYSIS1Upcoming developments include the £56 million Greengate Embankment office development in Salford, which is due for completion by spring 2016, and The Cotton Building in Spinningfields, which is expected to complete this year. The £500 million Paradise Circus regeneration project in Birmingham, which will see three phases of construction and will encompass 1.8 million sq ft of offices, is expected to be completed by 2017/18.

Looking ahead, the outlook for the offices sector remains optimistic with output growth forecast at 8.0 per cent for 2015, as UK economic performance is set to improve for another year. The UK is forecast to be one of the fastest-growing developed economies, against a backdrop of strengthening employment and wage growth. The unemployment rate was recorded at 5.7 per cent in the three months ending January 2015, representing a five-year low. Company expansions and hiring intentions mean demand for floor space will increase in line with this.

There are two main risks to the general construction outlook that may stall activity. The first is the uncertainty around the possible outcomes from the general election in May which, in the event that a government is not formed quickly, could dampen demand for office space; or, a potential EU referendum which could put off foreign investors. The second comes from the global backdrop, particularly risks stemming from the sluggish Eurozone which could impact on activity.

Amandeep Bahra
Construction Products Association