Rarely can the job of the London developer have been trickier. But despite the structural and cyclical headwinds, developers are again embarking on many new London schemes. The latest London Office Crane Survey (LOCS) by Deloitte records a striking 80% increase in the volume of new starts, to 4.4m sq. ft., across 50 schemes. This is undoubtedly a vote of confidence in London, after the intense disruption of the pandemic and severe supply chain difficulties and inflation that have followed Russia’s invasion of Ukraine.

Looking behind the headlines reveals the myriad factors confronting the London developer and the complicated calculations they are having to make. Hybrid working has reduced the demand for space, though it may take years to ascertain precisely to what degree. In addition, the recent sharp rise in interest rates after a prolonged period of ultra-easy monetary policy has placed the viability of many schemes in doubt – and the financial strains felt at the beginning of the survey period were exacerbated by the “mini budget” of September 2022. The pandemic, meanwhile, seriously disrupted supply chains, while the Ukraine war pushed up the cost of energy, and of energy-hungry materials, like concrete and glass, essential to construction.

Given these headwinds, what accounts for the uptick in new starts observed in our Summer survey?

Perhaps the most prominent factor driving London development, which we first heralded in 2020, is the threat of obsolescence, or “stranding” of assets. As we noted in our Summer 2022 LOCS, 80% of London office stock fell below the Energy Performance Certificate (EPC) grade A or B rating that is expected to be mandatory as soon as 2030. This has driven the number and volume of refurbs – 37 schemes comprising 3.2m sq. ft. – to the highest level since we began recording the data in 2005.

While the debate on stranded assets reflects the EPC legislation and is essentially about energy efficiency, many other factors are rendering swathes of office space unappealing. Occupiers now demand attractive interiors – fit outs with natural light, and with outside space are at a premium. It may also be clichéd to speak of the importance of location, but what constitutes a ‘good’ area is now more likely to be determined by transport connectivity as much as tradition. And attractive amenities – restaurants, bars and theatres – are also now required for offices to ‘earn the commute’.

One standout finding of the Summer 2023 survey is that the West End has, for the second survey running, trumped the City in terms of the volume of new starts – 1.3m sq. ft. versus 0.6m in the City. While the West End has long been a desirable location, the City for years provided the large floor plates demanded by banks. With a post-pandemic vogue for smaller, higher-quality offices, the West End is back in the ascendant. In a market of constrained rental growth, annual rents in Mayfair and St James’s hit £140 per square foot (psf) at the end of 2022, according to BNP Paribas, with Colliers International reporting a rent of £165 psf at 65 Davies Street in Mayfair in the first quarter of 2023.

The new Elizabeth Line (formerly Crossrail), stretching from Reading, Berkshire, in the west, to Shenfield, Essex in the east, already accounted for an astonishing one in six of all UK rail journeys in the final quarter of 2022. Unsurprisingly, developers told us that they expect the line to increase office demand, though only a third say their own plans have changed – perhaps because the line, under construction since 2009, was already baked into plans.

In short, the picture for developers is nuanced. To a greater degree than we anticipated, London offices are no longer a homogenous, fungible, asset class, with bond-like characteristics. Rather, there will be a demand for attractive, sustainable, well kitted-out space, close to transport hubs and amenities. It is the requirement to bring offices up to scratch, especially on sustainability grounds, that will drive London development for the rest of the decade.

Siobhan Godley Partner, UK Real Estate Leader

Find out more at https://www2.deloitte.com/uk/en/pages/real-estate/articles/crane-survey.html