Beware The Tsunami: 3 Things You Need To Know About London Offices
2025 is going to be a good year for Central London office market investment, but there's a tsunami of new and refurbished office space to overcome first.
So said Deloitte’s London Office Crane Survey Summer 2023, recording the highest volume of refurbishment starts since its data set began in 2005. There are 37 refurbishments totalling 3.2M SF, with the West End leading the way accounting for 1.3M SF.
As much as 10M SF of new office space will be delivered in 2023, with the volume of new office starts, including new build and refurbishment, up by 80% since the second half of 2022. Around 2.85M SF of this floorspace is already pre-let.
ESG is up, development is powering up and investors ought to pencil 2025 in their diaries. This is what you need to know.
Here Comes The Wave
The volume of new office starts is way up on recent history as the market picks up speed after a pandemic-influenced period of relative quiet. New starts in Q1 2023 topped 4.4M SF. The last time London saw numbers like this was Q1 2020, when it hit 5M SF. But this isn't a return to normal: Quarterly totals on this scale are rare, Deloitte said, and are entirely exclusive to first-quarter outputs (because of the construction cycle), and occurred in 2011, 2015 and 2016 as developers and investors began to recover confidence in a future that needed office space.
Also beware of statistical anomalies, Deloitte said: Citigroup's 900K SF owner/occupier refurbishment of 25 Canada Square represents approximately a fifth of the total volume of new starts. Excluding this scheme takes the total down to 3.5M SF, still a beefy 43% increase over the 2.5M SF of new starts recorded in the winter 2022 survey.
ESG: Jam Tomorrow?
For a few years Deloitte has asked developers a question designed to separate warm words on ESG from cold hard intentions: By when do you think all your new developments will be net-zero?
The answers, tracked over the last three years, showed a gradual feeling that 2024-29 might turn out to be the hot spot suddenly hardening in Q1 2023 into an overwhelming consensus.
Today 67% of respondents thought 2024-29 was going to be the ESG peak, up from around 25% during 2022. So strong has the focus on this period become that the number reckoning the ESG moment will come later in 2030-34 has sunk to an all-time low of 22%. The 2035-39 horizon has dropped off the radar altogether.
Deloitte pointed out that pressure to ensure that commercial buildings achieve a minimum of EPC B by 2030 is probably a strong influence. But what ESG compliance amounts to remains a hurdle and casts some doubt on developers' certainty. “This raises the question of whether a standard can be targeted without a clear understanding of what it means,” Deloitte observed.
Get Ready For 2025
This year's 10M SF tally of office completions feels like a big number, and it is. But it gets smaller if you take a closer look. Around 5.8M SF is under construction speculatively, a further 2.9M SF is already pre-let. The rest is either already completed and standing empty or it is smaller-scale rethinks.
The immediate future gets more interesting because, as things stand today, the pipeline supply falls off a cliff. In 2024 1.9M SF is under construction speculatively, a further 900K SF under construction but pre-let. The numbers creep up a little in 2025 and 2026 but remain subdued. But, of course, things will change.
Deloitte said this is both a good, and a bad, picture. Central London office take-up didn't reach 10M SF in 2021, and so the 2023 completion total risks oversupply and price dilution. Fingers crossed some schemes delay completion, it said.
“Looking further forward, as the real estate industry navigates macroeconomic and geopolitical headwinds and as the value of secondary stock declines in the face of impending MEES deadlines and wider stranding risks, the relative paucity of Grade-A supply is creating a wave of opportunity for investors. We therefore expect that 2025 will be the 'Year of the Investor',” Deloitte concluded.