London office construction hit a record just as virus arrived: Deloitte survey

London

LONDON'S office construction rebounded to a record high earlier this year. And then the coronavirus arrived.

Work on about five million square feet of new office buildings started in the six months through March, the most ever, according to a Deloitte survey. The wave of new starts followed the UK's decisive general election in December that helped ease the uncertainty that had weighed on projects most of last year.

Now developer confidence is falling off a cliff as the UK plunges into what the Bank of England says could be the worst recession in more than 300 years. Commercial real estate tenants are struggling to pay rent and some are questioning how much space they'll need in future.

"The good news is that the level of vacancy is significantly lower than in the last financial crisis," Mike Cracknell, a director at Deloitte Real Estate, said. "Around 40 per cent of the pipeline has already been leased in comparison with about 20 per cent to 30 per cent 12 years ago."

The overall volume of space under construction reached 15.3 million square feet in the period, a 29 per cent increase on the previous survey and more than 40 per cent above the long-term average. The spike was driven by big new projects in the City of London, including towers being built at 6-8 Bishopsgate and 40 Leadenhall Street.

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A survey of the top 30 London developers carried out by Deloitte at the end of March found 57 per cent expect demand for space to be much worse following the outbreak, with the rest predicting it would be slightly worse. None expected things to be unchanged or positive.

A separate survey by broker Colliers International Group Inc found vacancy rates in London could rise to 6.5 per cent by the end of the year, from 5 per cent at the end of March. As a result, headline rents will likely fall by less than 5 per cent, the research found.

The modest declines, replicated across Europe, reflect the short-term need for space as companies adapt their offices for social distancing, meaning each worker will require more space.

"Businesses will need all the space they currently have," Damian Harrington, head of EMEA research at Colliers International said. "Therefore we do not anticipate a glut of space being released back to market in the short term." BLOOMBERG