London office boom could turn to bust, report warns

Quantity surveying firm EC Harris says that there are more than 150 projects lined up in the capital, which could deliver up to 53 million square foot of gross office floor area by 2016

Some 85% of this is new build and just 15% is classed as refurbishment space.

However, many of the projects are struggling to attract pre-let tenants and external.

The report, “London Office Development: The Challenge Ahead” confirms that the City of London remains the centre of attention for developers and investors alike, with more than 60% of the total area (34m square foot gross internal area) and more than half of the planned projects located there.  The average size of a City project is about 420,000 square foot gross, nearly twice the size of those planned for the West End or Midtown, reflecting the large scale tower schemes that are planned or under construction such as 20 Fenchurch Street and the Leadenhall Building.

Midtown is characterised by smaller projects, with more than 30 potential developments totalling seven million square foot gross internal area on the pipeline.  In comparison, the West End pipeline is relatively restrained, reflecting the greater planning challenges.  Nevertheless there are still 25 potential developments that could commence pre-construction or start on site over the next five years.  The average development size in the West End is 240,000 square foot gross.

EC Harris head of commercial development Richard Taylor, who wrote the report, said: “On paper, the development pipeline for London offices shows massive potential and investment.  However, in reality the market is very different, with a large number of these projects unlikely to be delivered as they struggle to find pre-lets and external funding.  To stand a chance for success, projects need to differentiate and create a significant market advantage if they are to maximise their chances of completion.”

The growth of this pipeline is directly driven by the reported 25-70 million square foot office space leases that are expected to expire before 2017.  However, the report identifies the euro crisis, diminishing tenant optimism and ever tighter funding markets, as key reasons why might decide to stay put and extend existing leases rather than sign up for unbuilt schemes.

The report makes various recommendations to speculators, such as “create value”, “move fast” and “ensure projects are forward thinking”. It also suggests forming joint ventures to spread risk.

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