Construction projects at London offices put on hold following peak construction activity
London's Office Market Shifts Towards Sustainable Refurbishments
According to Deloitte's latest survey, the decline in new office construction starts in London is primarily due to a shift towards refurbishments. This trend is driven by a combination of factors, including wellbeing and modern workplace expectations, environmental and sustainability considerations, tight supply, and economic factors.
In the heart of London, the West End has emerged as the most active submarket for new construction activity, surpassing the City of London. The trend of office refurbishments has been particularly popular in the West End, with three large new starts totalling 945,000 sq ft. Upgrades of listed buildings have contributed to this increased activity.
The West End's focus on sustainable refurbishments aligns with the growing corporate sustainability targets and the pressure on landlords to offer greener office solutions. Refurbished offices are being designed to meet contemporary demands such as abundant natural light, improved air quality, flexible layouts for hybrid work, ergonomic furniture, and wellbeing amenities.
Economic factors also play a significant role in this shift. Although demand for office space remains strong, the market faces tight supply and rising prime rents. Companies may be turning to refurbishments of secondary buildings as more viable options because new speculative office projects have slowed down due to economic uncertainties and shifts in workplace strategies.
Deloitte's broader economic insights also suggest that current economic uncertainties, including lower consumer confidence and investment hesitations, may contribute to delays or reductions in new office projects. Businesses may be postponing decisions on new facilities amid rising costs, tariff uncertainties, and shifts toward digital/data center investments rather than traditional office structures.
This trend is reflected in the data, with an estimated 4.2 million sq ft of office space having started construction across 42 schemes since last December, which is 18% lower than Deloitte's last survey towards the end of 2023. The only area in London that recorded an increase in activity is Midtown, with a 12% uptick.
Office completions in London are expected to be lower this year compared to 2023, which saw the second highest volume of completions in the history of the survey at 7.5 million sq ft. This shift towards sustainable refurbishments may lead to a medium to long-term supply squeeze in London's office market.
Margaret Doyle, Deloitte partner and chief insights officer for financial services and real estate, states that developers are trying to de-risk schemes by breaking up projects into discrete chunks and delaying contractor instructions until a substantial portion of the scheme has been let. These defensive actions aim to mitigate the risks associated with the current economic climate and the uncertainties surrounding office demand in the post-pandemic world.
In conclusion, London's office market is undergoing a significant transformation, with a shift towards sustainable refurbishments that prioritise wellbeing, environmental concerns, and economic considerations. This trend is expected to continue in the medium to long term, potentially leading to a supply squeeze in the London office market.
[1] Deloitte (2023). London Office Crane Survey H1 2023. [2] Deloitte (2022). London Office Crane Survey H2 2022. [3] Deloitte (2022). London Office Crane Survey H1 2022. [4] Deloitte (2021). London Office Crane Survey H2 2021. [5] Deloitte (2021). London Office Crane Survey H1 2021.
In response to economic uncertainties, companies are increasingly turning to real-estate refurbishments as a viable option for adjusting office spaces to contemporary demands such as sustainability, wellbeing, and flexibility, highlighting the shifting priorities in finance and investing within London's business sector.
The focus on sustainable refurbishments is expected to persist in the medium to long term, impacting the supply of office spaces in London and possibly leading to a consistent upward pressure on prime rents due to the reduced availability of new speculative office projects in the market.
