Office developments slow to a crawl

The amount of new office developments starting has fallen to its lowest level since the financial crisis, with developers put off by high costs and more people working from home.

Construction companies embarked on barely any new office projects over the spring and summer, according to CoStar, an analytics group. Between April and June, work began on less than 500,000 sq ft of new office blocks, a “precipitous” drop on the 2.9 million sq ft on which builders broke ground in the opening few months of 2024, when several big schemes began in London.

CoStar said the second quarter had been “easily” the weakest three-month period for new office construction in 15 years. It means that, over the past 12 months, work has begun on only 7.8 million sq ft of office buildings, the lowest amount in more than two decades. For context, the Gherkin in London has about 500,000 sq ft of office space.

Outside London, only one new office project has started this year in the “Big Six” regional cities. That was in Leeds.

Mark Stansfield, senior director of market analytics at CoStar, said the general election was likely to have caused some developers to sit on their hands, although “high borrowing and construction costs and concerns over the future of office demand” were also playing a part.

Savills, the property agent, estimates that the cost of building an office is between 30 per cent and 50 per cent higher than it was three years ago. About half of that is “true” inflation, such as costs for materials and labour, while the other 50 per cent reflects the fact that businesses are demanding better-quality bases.

Interest rates, too, have deterred developers, increasing the cost of financing while reducing the value of commercial properties. “You’ve got build costs going [up] and you’ve got values going [down],” James Evans, head of national office agency at Savills, said. “A developer will look at it and go, ‘Well, I’m not going to make any money, so why would I build an office building?’ ”

CoStar estimates that 27.2 million sq ft of office space is being built nationwide, the lowest amount for three years. The bulk of that will be ready before the end of 2025, after which developers expect there to be a supply drought.

Because of the dearth of new construction, rents, particularly for the best-in-class offices, are rising. In Bristol, rents for “prime” offices are up 12.9 per cent year-on-year, while they have increased by 10 per cent over the past 12 months in Manchester, according to Savills.

Evans said this rental growth, coupled with easing cost inflation and falling interest rates, would encourage developers to start building offices again soon. “Like any cycle, you will at some point reach the bottom and it feels very much as if we’re approaching that,” he said. “That increase in rent and a reduction in [interest] rates mean that, at some point, suddenly you’re in a position where you can make a development work.”