Construction projects in London dipped this year, but positive signals like lower interest rates and easing construction cost inflation have boosted optimism amongst developers.
The number of construction projects started between April and September this year fell by 12 per cent, with refurbishments down 57 per cent, according to the Deloitte London office crane survey.
It’s the first time refurbishment starts have fallen below the level of new builds since 2019.
Caroline Waldock, partner and real estate lead at Deloitte, said its been a “challenging year” for London’s office market.
“Not only has it had to grapple with continued geopolitical and economic uncertainty, but construction contractor insolvencies have placed additional pressures on an already distressed construction sector,” she said.
The Deloitte survey – which collected data between April and September 2024 – recorded 3.7 million sq. ft. of new office construction starts across 29 schemes, with life science schemes responsible for just over a third of those new starts.
But Waldock warned that while activity in the life science sector “may reinvigorate quieter markets in the short-term, but demand for this space is less certain”.
Cut in interest rate ‘crucial’ for boosting construction
Waldock said the Bank of England’s decision to start cutting the base interest rate in July this year has made many developers more optimistic about the future of the market.
“Looking further ahead, the recent cut in interest rates and the easing of construction cost inflation could be crucial in boosting new scheme numbers. Our survey has recorded a renewed sense of positivity among developers that suggest the decreases we’ve noted may be short-lived,” Waldock said.
Similarly, developers of refurbishment projects are optimistic – 92 per cent said their development pipeline will increase or stay the same in the next six months, according to Deloitte. The proportion of developers expecting a reduction in their pipeline was markedly less than two years ago, at 55 per cent versus eight per cent.
Philip Parnell, partner and head of valuation and real estate climate & sustainability lead at Deloitte, added: “Refurbishment levels have pared back markedly in this survey from previous high levels, and likely a reaction to the economic, geopolitical and wider global concerns prevailing during the survey period.
“However, developers’ appetite to maintain their pipeline of activity, coupled with the continuing need to address evolving occupier requirements and ESG credentials, suggests this may be a blip rather than a trend.”
Squeeze on rents for in-demand office spaces
For office space, supply of high-quality buildings which adhere to government sustainability and energy guidance is low, while demand is high.
Plus in the last few months, PwC, Santader and Amazon have all pushed staff to return to the office – PwC told its employees and partners just last week that its new hybrid working policy would require them to spend at least three days a week with clients or in the office.
This means that high construction costs and fewer completions will inevitably push rents up further as companies compete over the best-quality space.
Waldock said: “Despite developer optimism, it is likely that the many challenges faced by the construction industry will continue to impact completion levels for the foreseeable future.
“The subsequent squeeze on supply may well lead to increased rents for the most in-demand office spaces.”