London office starts lowest in 15 years
New starts on London office developments have fallen to their lowest level since 2010, City PM can reveal, as stubbornly high interest rates and thorny planning laws continue to blight construction in the capital.
In the 12 months to October, construction got under way on just 2.5m square feet (sq/ft) of London office space, less than half the figure for the same period last year and roughly a quarter of highs hit before the UK left the European Union.
Developers broke ground on fewer projects across the development spectrum, with construction starts on smaller and larger buildings both found to have tumbled to decade lows.
Just five new buildings under 100,000 sq/ft have got under way in the capital this year, compared with nearly 50 in 2018, according to the analysis from property data giant Costar.
Meanwhile six major developments – measuring over 100,000 sq/ft – have broken ground relative to the 29 that started in 2015.
London office headaches
Office developers have been battling an exacting macroeconomic backdrop, which has seen their input costs balloon after several years of inflation and high energy costs.
The sharp and sticky price rises in both construction and across the wider economy have also served to keep borrowing costs – a significant precursor to the affordability of major construction projects – stubbornly high in the wake of the 2022 energy crisis.
High interest rates have simultaneously depressed overall valuations, dampening investor demand over fears a major project may not drive sufficient returns.
“There may be several reasons for the decline in small building starts. Financing challenges related to rising debt costs may have impacted smaller projects more significantly,” said Patrick Scanlon, Senior Director of Market Analytics, Costar.
“Large developers building major projects often have better access to capital and institutional financing, while smaller projects rely more on traditional loans, which are costlier under high-rate conditions.”
Laborious planning laws have also been a thorn in the side of many major developers, particularly in London’s West End, where the City of Westminster councillors recently pushed through laws that threaten the feasibility of many new projects.
The city-wide slump has also sparked fears of an office space supply squeeze hitting the market in two years’ time, when what few new developments under way this year are expected to come online.
Scanlon added the plan was likely to result in a “significant increase in pre-letting activity”, assuming tenant demand remains stable, as firms scramble to secure their “preferred real estate options”.