CoStar Analysis: Office construction starts have fallen sharply in Central London since the Brexit vote

By Mark Stansfield - Tuesday, October 10, 2017 13:52

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The level of new office construction starts across Central London plummeted in the five quarters following the EU referendum.

On a sq ft basis, new development activity fell by 74% when compared with the five quarters leading up to the vote, according to CoStar’s data.

Whilst new development starts have not ground to a halt completely, the bullishness of Central London developers has clearly waned in recent quarters. Work began on 2.1 million SF across 20 office schemes in the last five quarters, marking a 74% drop on the preceding five-quarter period, when 48 schemes totalling more than eight million sq ft commenced construction. New starts were also down 55% on the long-term quarterly average going back to 1998. This contrasts with the period from Q2 2015 to Q3 2016, when new starts were 70% above the long-run average (or a colossal 136% if the bumper Q1 2015 was included).

Of the three main Central London markets (City, West End, Midtown), the largest slowdown in new starts was recorded in the City. Despite being the location of Central London’s largest start post-referendum—British Land and GIC’s 100 Liverpool Street (530,000 sq ft)—total starts fell by 81% to 920,000 sq ft. This equates to 184,000 sq ft per quarter, well down on the five quarters leading up to the vote, when one million SF was beginning each quarter, and 58% below the long-term quarterly average. In the West End the impact was less profound, partly due to the more subdued level of development activity in the period leading up to June 2016.

Source: CoStar Group            As of Q3 2017

At 657,000 sq ft, the level of new starts from Q3 2016–Q3 2017 dropped by just 15% compared to the previous five-quarter period and was only 7% below the long-term quarterly average. The largest start was the Brunel Building in Paddington (244,000 SF), where construction commenced in August 2016.

Shrinking developer confidence was clearly a major factor behind the slowdown, as well as more constrained development finance. The impact of Brexit on future office demand has offered developers pause for thought, making speculative schemes less likely to go ahead without a significant pre-let.

However, it could be argued that Central London office development would likely have slowed anyway, given the sheer amount of space under construction. CoStar’s data shows that close to 15 million sq ft of office space was under construction at the end of Q2 2016, the most in more than 15 years and well above the peak of the last cycle in 2007 (see chart). The level of space under construction has fallen back in recent quarters as new starts have slowed. However, it remains relatively high, standing at close to 11 million sq ft at the end of Q3 2017.

mstansfield@costar.co.uk

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