BNP Paribas Real Estate: time for developers to pick up their tools?

Development activity in the City has slowed significantly since the onset of the global credit crunch and subsequent recession with total activity falling 33% since the early 2008 peak. The amount of space currently under construction is just 2.9 million sq ft down from 8.4 million sq ft in 2008, a fall of 65%. Just over 3.3 million sq ft of office space completed in 2009, an annual total lower than expected at the start of the year as some schemes were delayed or put on hold due to weak market conditions.

Looking forward to 2010, just over 2 million sq ft of space in the City is due to be completed with 43% of this space already pre-let. As such, the research suggests that 2010 could be a good time for developers to pick up their tools as a lack of new schemes meets head on with a pick-up in the occupational market.

Dan Bayley, head of national sales and lettings at BNP Paribas Real Estate, comments: “The most immediate market indicator will be whether the resurgence in occupier take-up in the second half of 2009 in the City will be maintained at current levels and if this will spread across to the other London office markets. Whilst it is likely that City take-up will fall back somewhat from the past two quarters, there are likely to be shortages of completed stock for larger requirements by the summer. This will lead to the return of larger occupiers needing to consider taking pre-lets off plan of new or major refurbishment schemes, or to restructure their existing occupational portfolios.”

Despite the recession, almost 2 million sq ft of office space has been granted permission during 2009 in the City, the largest of which is Hammerson’s 756,000 sq ft Bishop’s Place scheme, in addition to four other schemes of over 100,000 sq ft. The largest scheme currently under construction in the City is Minerva’s 523,000 sq ft St Botolphs development which is due to complete mid-2010 and in 2011 Heron International’s 440,000 sq ft Heron Tower and Hines’ 400,000 sq ft Cannon Place will also come through the development pipeline. However, with the occupational market likely to be at a more healthy level in 2011 and typical take-up in the City of 4-5 million a year, there still may be an under-supply of new Grade A space.

The West End has seen total development activity fallen by 14% since its 2008 peak. Around 1.5 million sq ft of office space is expected to complete during 2009 with a further 1.2 million anticipated in 2010. The Midtown market has 620,000 sq ft under construction and planning consents for just over 1 million sq ft of space. In the Docklands, construction levels stand at just less than 2 million sq ft. Although there remains a sizeable 6.5 million sq ft of office space with planning consent, only one scheme, Riverside South at Westferry Circus is under construction, delivering just under 2 million sq ft towards the end of 2011. It is unlikely that this situation will change in the short-term given that vacancy rates in the Docklands remain high.