The buoyancy of the occupational market, coupled with the growing focus on improving energy efficiency, particularly with MEES coming into view over the next few years, has resulted in a robust development pipeline despite rising construction costs. We are anticipating development completions from now until the end of 2026 will reach 30.4m sq ft.

Already 18% of the new developments and extensive refurbishments expected to be delivered over the next four and a half years have been pre-let, and 5% of speculative space is currently known to be under offer. However, it is worth noting this is down from 22% at the end of H1 2020, where pre-lets over the same period accounted for 6.4m sq ft of the pipeline, compared to 4.8m sq ft at present.

Focusing on speculative space due for completion between now and 2026, the City Core accounts for the largest proportion with 28%, followed by SE1 with 14% and then by the City Fringe with 11%.

Six months ago we anticipated development completions for the first half of this year would reach 2.9m sq ft. However, by the end of the first half, only 62% of this actually reached completion. Increased pricing on materials and supply chain issues, as a result of wider macro trends, has kept upwards pressure on costs and project timescales, resulting in further expected delays.

This is reflected by the results of the latest Savills ProgrammE and Cost Sentiment Survey (S.P.E.C.S) Q2 2022, which showed the sentiment around build costs and project timelines continue to remain at elevated levels, with most sectors seeing upwards pressure on costs and timescales and expecting this to continue over the next 12 months.

The continued high level of developer confidence and appetite for redevelopment opportunities is also reflected by the high levels of demand for land in Central London which has led to a 143% spike in commercial and mixed-use development transactions in H1 2022, compared to the same period last year, with £1.8bn trading year to date across 32 transactions. Looking ahead, currently, there is c.£1bn of development deals under offer and over £1bn of available stock being tracked across Central London. Though, we expect the inflationary and financing pressures to take some heat out of the market in the short term and result in this year’s overall volume of development transactions falling shy of the recent annual average of c.£3.3bn.

The latest consensus figure on construction price inflation for this year currently stands at 6.1%, with almost all forecasts having been revised upwards over the quarter. This could have an impact on the future pipeline, with 70% of the space scheduled for delivery between 2024 and 2026 yet to start. It is therefore likely that development completions for 2026 will be much lower than currently expected. We could also potentially see the start of more schemes being delayed until pricing pressures alleviate or the viability of more schemes being reappraised.

Notable schemes to complete over the first half of this year include 280 Bishopsgate, EC2 (260,000 sq ft) which is almost fully let; Bloom, Farringdon, EC1 (134,000 sq ft) also almost fully let; 16 Great Marlborough Street, W1 (105,000 sq ft) which was pre-let to Diageo.

Development activity across Central London is expected to reach a record 9m sq ft during 2023, with completions in the City on course to reach its highest level in over 30 years and the West End set to see a new record, just shy of 3.5m sq ft completing. However, in reality, this will likely reduce with almost a third of this expected to be delivered in Q4, increasing the likelihood that some of these schemes will be pushed out to 2024.

Some notable schemes due to complete during the second half of 2023 include 40 Leadenhall, EC3 (870,581 sq ft), 20 Ropemaker, EC2 (424,275 sq ft), Millennium Bridge House, EC4 (292,000 sq ft) and 21 Moorfields, EC2 (which is fully pre-let to Deutsche Bank). 22% of 2023’s pipeline has been pre-let, and currently, a further 6% is under offer.

There has been a significant increase in the number of schemes that are aiming to achieve better sustainability credentials. By sq ft, the proportion of schemes in the pipeline targeting BREEAM Outstanding and Excellent now account for almost two-thirds of the space being delivered. Whilst new developments account for 66% of the overall sq ft that will be delivered, there is an even split by number of schemes, with 49% of the current pipeline consisting of extensive refurbishments.

At present, 19% of new schemes (by number) scheduled for delivery between now and 2026 are currently known to be targeting a BREEAM rating of Outstanding, a further 49% are targeting Excellent, and 3% are targeting Very Good.

In comparison, 40% of refurbishments (by number), are now targeting a BREEAM rating of Excellent or Outstanding. This is up 15% on the number of refurbishments we recorded at this point last year that were targeting a BREEAM rating of Excellent or Outstanding, giving some early indication of a growing preference for retrofitting and sustainably refurbishing, as a result of the growing awareness of embodied carbon.

Whilst we are expecting to see more investors considering refurbishment options, new builds will still remain necessary where a whole-life carbon benefit and improved efficiency can be better achieved.

In the past, we have seen strong tenant demand result in high levels of pre-letting activity across Central London, with pre-letting accounting for around a quarter of leasing activity over the past five years. And with occupiers viewing their future space commitments as a tool for working towards their own net zero targets, three-quarters of space that has been pre-let since the pandemic has been BREEAM rated Excellent or Outstanding.

The importance of sustainability and reducing carbon emissions in office space, and the understanding of how to achieve these objectives, will continue to mature, as we expect the focus on the energy in use and efficiency measurements to grow as EPCs give way to measures that monitor actual energy usage, such as DECs or NABERS.

_{Read the other articles within Spotlight: Central London Office Outlook  below}