London’s recovering office construction sector has begun to boom with developers starting work on buildings with a total of 2.5 million sq ft of space in the first quarter of the year, according to new figures today.
Hopes that interest rates will start to fall later in the coming months combined with strong demand for Grade A space have helped encourage a burst of activity after the construction doldrums of the previous year, particularly after Kwasi Kwarteng’s mini-Budget of September 2022.
Data from analysts CoStar show ground was broken on 2.5 million sq ft of space between January and March, more than 50% higher than the 10 year quarterly average and one of the highest quarterly figures of the last five years.
It follows a strong Autumn with 4.5 million sq ft of office starts over the six months.
Patrick Scanlon, CoStar’s senior director of market analytics, said: “London’s office market is cyclical and one of the key signs we are going into an upswing is developers clamouring to get space into the market before the next cycle becomes the next peak. One quarter is an anomaly but two quarters is a trend.”
Construction starts in London accounted for almost 80% of the total across the UK, the highest for 12 years, suggesting London is leading a recovery that has not yet reached the regions. London makes around 48% of the national total on average. The City alone accounts for 40% of London starts.
The expected fall in the cost of debt is thought to be a major factor in the upsurge. With the Bank of England leaving its rate at 5.25% since last August in the battle against inflation there has been little incentive for investors to back major property scheme as the low risk returns from keeping cash with the bank has discouraged investment in new schemes.
However last week the Bank gave its strongest signal yet that rates will start coming soon with the City increasingly confident the first cut will come in June, or August at the latest. Inflation is expected to fall to its 2% target next month when the April figure is revealed.
Major London buildings where work has started since September include British Land’s 2 Finsbury Avenue in Broadgate, totalling 750,000 sq ft, which is already 33% pre-let to US hedge fund Citadel with an option on a further 130,000 sq ft. British Land has also begun construction on the Dock Shed and Three Deal Porters in Canada Water in Docklands totalling almost 400,000 sq ft.
Rival property giant Landsec has decided to push ahead with its 370,000 sq ft Timber Square scheme in Bankside, comprising two large office buildings.
Other landmark projects getting under way include the 50 Fenchurch Street skyscraper in the City, and 120 Fleet Street at the former Daily Express building.
However, London’s vacancy rate has been on the rise since the beginning of 2023 and leasing activity in London fell to its lowest level for three years in the first quarter of 2024.
However, demand for top-quality space has been strengthening with a record 13% of leasing deals in London achieving a rent of more than £80 per sq ft over the last 12 months.
