London office market battles red hot construction costs
Glimmers of light are beginning to emerge for property developers in the City and the West End as demand for office leases climbs to its highest quarterly take-up so far this year, but rising construction costs are expected to hold back recovery.
Figures from property consultancy Savills, showed that the number of leases secured in central London climbed 10 per cent in the third quarter of the year, covering a total of 6.1m sq ft.
This was the strongest reading on leasing activity so far this year, but remained 21 per cent down on the long-term average.
The health of London’s office market, particularly in the Square Mile has been in the spotlight since a boom in hybrid working sparked by the pandemic left employees hesitant to return to work.
Employees dragging their heels over returning to the physical working environment ultimately led to a slowdown in demand for space and to many employers shrinking the size of offices they already occupied.
At the end of the third quarter, central London supply stood at 22.8m sq ft, which equates to a vacancy rate of 8.7 per cent, up 0.1 percentage points on the previous quarter.
Jonathan Gardiner, head of central London office leasing at Savills, told City A.M that the market was “still challenging” despite noting that 44 per cent of occupiers are looking to increase the size of their space.
Going into the final quarter and next year, the development pipeline remained strong, Gardiner said, but he warned of slowdowns due to red hot construction costs fuelled by inflation.
He said: “[Some] 51 per cent of the space scheduled for delivery between now and 2027 is yet to start.
“With construction and financing costs showing little signs of abating we anticipate this will result in further delays and delivery challenges for schemes that are not yet under way.”
He added: “Despite resilience in the occupational office market, the significant factors of higher construction costs, softer investment yields and high costs of development funding are, in particular, impacting viability and hence impacting on new development or major refurbishment starts.”