New London office construction activity has fallen 42 per cent from a year ago as Brexit and other uncertainties cast a shadow over the property market.
Work began on 40 new office developments totalling 2.8m square feet over the past six months, down from a record 4.8m square feet recorded a year earlier, according to Deloitte Real Estate’s Crane Survey.
Total development activity rose slightly from a year ago to an eight-year high of 14.8m square feet.
Will Matthews from Deloitte Real Estate said that despite this rise, the market appeared to be at a “turning point”.
“For a long time we have effectively been seeing rising construction activity, falling vacancy rates and strong tenant demand. This is the first report in which vacancy rates have not fallen but risen, and tenant demand is down quite noticeably.”
The central London vacancy rate rose from 3.9 per cent at the start of the year to 4.8 per cent at the end of the third quarter, Deloitte said.
Take-up of new offices by companies has also declined: the volume of existing office space let so far in 2016 was down 37 per cent from a year ago. That was particularly because of “subdued” lettings among financial services businesses, Deloitte said.
Chris Lewis, head of occupier advisory at Deloitte Real Estate, said the reduction in office moves was partly but not entirely because of the UK’s vote to leave the EU.
“There is no doubt that Brexit has been a component of a general cautiousness among occupiers, but we are seeing with occupiers that these are quite uncertain times generally,” he said.
“Technology is affecting how they do business, and they are wrestling with the growing millennial population within their businesses. Then there are the French and German elections, the vote in the US and the possibility of an early election here [in the UK].
“Companies may be reluctant to sign up to 10, 15 or 20 year leases on buildings when there’s all sorts of uncertainty out there. Some are saying they would prefer to extend their current leases for a short while until they feel better informed.”
Construction levels were highest in the City of London, where 1.1m square feet of schemes were begun over the past six months. The south bank of the Thames also saw a sharp rise in activity, with 800,000 square feet of new schemes starting work, dominated by the new headquarters of Royal Dutch Shell.
However, a quarter of all office construction projects under way have delayed their planned completion dates, meaning the expected peak of delivery of new office space is now expected in 2019.
Deloitte said the delays were partly because of a shortage of construction labour but that uncertain prospects for the market were also playing a part.
Mr Lewis said the market was swinging in favour of the tenant. “If you’ve got slightly weaker … demand and growing delivery of space, you see a pressure on vacancy rates. That’s good news for occupiers.”
Rents have so far remained steady across prime London office markets, but landlords may need to “reconsider their pricing” if vacancy rates keep rising, Deloitte said.