A total of 6.4m square feet is now under construction compared to an all time low of just 2.7m six months ago.
“This survey records a dramatic positive change in construction activity as anticipated in our last report,” said head of research at Drivers Jonas Deloitte. “The race is on to deliver schemes to take advantage of the dwindling supply of Grade A space in 2012 and 2013.”
According to Drivers Jonas Deloitte, 25 new schemes have started construction. Buildings are big – nearly half the schemes on site are over 100,000 square feet. Three new City towers will deliver over 160 floors in 2014, and the West End has hit a two year construction high with two million square feet and a record number of new starts.
The confidence that developers are showing in the market is evidenced by the size of the schemes being built. Just under half of the schemes under construction are 100,000 sq ft or bigger. This includes a number of schemes that are large by traditional West End standards and even by City standards. Duggan said: “Large buildings in the West End, such as British Land’s Regents Place and Legal & General & Mitsubishi’s Central St Giles have been star performers over the last year – developers have recognised this trend and are looking to cash in on this type of occupier demand.”
Head of transactions at Drivers Jonas Deloitte Matthew Elliott said: “The big story, perhaps the only story, is the building of the new City towers. If all are built we could see over 200 tower floors coming to the market at a similar time in 2014/15 - an unprecedented situation - and this excludes The Shard being built on the other side of the Thames. Some will worry that this will lead to oversupply and falling rents, but others say that this is a further sign of confidence, a sign that London remains the global financial centre. Everyone is talking about it but the market doesn’t yet know how this will play out.”
Construction has doubled over the last six months to 2.8 million sq ft with five new starts recorded, the first new activity in 18 months. The much-talked-about City towers are responsible for the majority of the impending space with 20 Fenchurch Street, The Pinnacle and The Leadenhall Building all scheduled for delivery 2014.
However, despite increased construction levels, the amount under construction remains below average with just 120,000 sq ft being delivered in 2012 and nothing currently scheduled for 2013. This lack of new supply puts further pressure on the level of available space with rents expected to continue to rise as occupiers compete for the best stock.
Duggan said: “It’s looking increasingly likely that 2012 will be the lowest year of completions on record with a window of opportunity still remaining to deliver into 2013 - but only if work starts immediately. We expect rents to continue to rise over the next two years as occupiers are forced to compete for the reducing supply of top quality space.”
The survey also heralds a warning that the current supply picture is likely to change as Drivers Jonas Deloitte calculates that there could be a further 1.2 million square feet delivered into 2013 from schemes with vacant possession and planning permission, and a further 2.8 million sq ft with permission that could be delivered into 2014 on top of the 2.3 million sq ft already being delivered into that year.
Elliott comments: “The lack of buildings will drive up rents over the next couple of years. As a tenant, you could wait until 2014 when there will be more choice but the rents will be higher. So the savvy larger occupier will be looking to commit to pre-lets - this way you get the building you want at today’s rents.
“The good news for developers is that the big players, like Santander, Schroders, AON and others are out in the market but we need more. It will take more than one or two large tenants to absorb the volume of floorspace scheduled for the next few years. Remember too that not all occupiers will want to take a tower building and many tenants want traditional ‘ground scrapers’ – we need more of these.”
The Crane Survey counts the largest number of new starts ever recorded in the West End in a single survey. This means the West End now has the highest amount of space under construction for over two years. 13 new schemes totalling 1.4 million square feet of floorspace have started over the last six months bringing the total volume of office space now being built to just under two million. This is a clear sign that developers are taking note of the low levels of Grade A space and the rapidly rising rents. At present just eight per cent of current available space in the West End is of Grade A quality, therefore developers are working quickly to turn new space back into the market to capitalise on the anticipated rental growth.
“Only 15% of the space currently under construction in the West End is in Mayfair – it is still the place to be, and for the hedge funds and others paying a very high rent per square foot, this is really not a problem as the units sizes are small,” said Elliott. Small high quality units are already achieving rents of £90 plus per square foot, a significant increase from £65 just 12 months ago, and we anticipate rents will continue to climb with new stock remaining scarce.”
Despite activity being at a two year high there is currently nothing under construction post 2013. Indeed, the West End is not, at the moment, looking oversupplied with the total scheduled for completion over the next three years some way under the average take up of new-quality space for the West End market.
Outside the City and West End, Midtown developers have been busy with six new starts – tripling construction activity in just six months with just over 600,000 square feet under construction.
However, activity in the other London submarkets remains scarce. Indeed, there has been just one new start across all the other markets - The Place (Sellar Property Group’s 430,000 square feet ‘mini Shard’) which commenced just a stone’s throw from The Shard in Southwark.
Duggan concluded: “Construction has increased by 137% over the last six months as the development sector mirrors the significant improvement seen in the occupational and investment markets over the last year. We believe developers are right to be building into the London office market which continues to outstrip its global competitors in terms of its power as a financial centre and a haven for foreign wealth. The next two years will see a limited supply of top quality office space delivered to the market which will push rents on further. This will encourage more developers and funders to start building - we continue to believe that the best buildings in the key locations will be successful but caution those looking to deliver in 2014 and 15 in what is likely to be a fully supplied market if all the schemes we are monitoring go ahead.”
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