Deloitte Real Estate’s latest London Office Crane Survey highlighted the seismic impact of Covid-19 on the capital.
Siobhan Godley, partner and head of Deloitte Real Estate, said the market was in a “state of suspension” while developers assess the long-term impact of working remotely on the office market.
Godley said: “As a bellwether of developer sentiment and future office supply in the capital, this crane survey shows a decline in new construction starts to just 2.6 million sq ft across central London.
“This is down significantly on our previous survey, but remains broadly in line with the survey’s long-term average.
“Notably, a higher than average 40% of new construction starts have already been pre-let, indicating less speculative construction.”
Total office space under construction in central London is now 15.1 million sq ft.
This is similar to the level recorded in the previous survey (15.3 million sq ft, the highest since 2002) as developments are now taking longer to complete.
Mike Cracknell, director at Deloitte Real Estate, said: “Our data reveals that 3.3 million sq ft of office construction was not completed as scheduled between April and September and remains under construction.
“Had these projects completed on time, the total volume under construction would be almost a quarter lower.”
The developers’ sentiment survey showed that 57% of respondents said letting conditions were either the same or worse when compared to the end of March this year.
Cracknell added: “Of the developers we surveyed, a clear majority – 85% – pointed to weak tenant demand as the major obstacle to starting any new development.
“Until there is more clarity about occupiers’ office plans, developers will hesitate to embark on new projects, particularly speculative ones.
“Nonetheless, the news about vaccines has already resulted in a re-rating of real estate stocks, and may see both a bigger shift back to the office in the short term, and a strengthening of investor demand in London offices over the medium term.”
This reluctance to embark on new construction, especially new builds, has led to a shift towards major refurbishments.
The survey found that more than two thirds of the new construction starts involved an extensive upgrade of existing office stock across 28 separate projects.
Cracknell said: “By transforming outdated buildings into Covid-safe, high-quality workspaces, developers are looking to upgrade and futureproof their offices in a market where occupational demand is increasingly discerning.”
The City of London, which dominated construction activity in previous surveys, has seen new construction activity fall by 60% to 1.2 million sq ft across 10 schemes.
This compares to 2.8 million sq ft across 16 schemes in the previous survey. Just under half of the City’s new construction starts are available to let suggesting a lower appetite for speculative development.