London Offices Crane Survey Sentiment remains positive Winter 2012 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Market overview This latest Crane Survey records a pause in the large increases in construction activity we have been reporting over the last eighteen months. However, whilst lower than the last survey, the volume of new starts over the last six months suggests that developers and investors still have confidence in the returns available in the London office market. 2012 Winter – Office space under construction Total U/C (sq ft) Let U/C (sq ft) Available U/C (sq ft) City 4,081,000 1,020,000 3,061,000 Docklands 540,000 250,000 290,000 King’s Cross 474,000 272,000 202,000 Midtown 607,000 45,000 562,000 Paddington 31,000 31,000 0 Southbank 994,000 106,000 888,000 West End 2,308,000 476,000 1,832,000 Total 9,035,000 2,200,000 6,835,000 Office space under construction Million sq ft 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 City Docklands King’s Cross Midtown Paddington Southbank West End 12 months ago (Winter 2011) 6 months ago (Summer 2012) Today (Winter 2012) 2 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. With the volume of new starts matching the completion Helping sustain confidence in the development market levels recorded since the last survey the total amount of is the continued flow of encouraging news detailing space under construction has remained relatively flat; leasing activity at the schemes under construction. falling by just 2% to 9 million sq ft. This pause in activity The data shows that 24% of the space under will come as a relief to those who were concerned about construction is already let prior to completion and we the strong increases in development over the last couple are monitoring a number of requirements that, once of years – construction has quickly climbed from the all transacted, will further reduce the volume of floorspace time low recorded two years ago to reach long-term available to let. average levels. Despite these leasing deals on new space, total This should not, however, be seen as a reduction in transactional activity remains low and whilst the general confidence in the market: this report details 25 new consensus is that the level of development activity is starts, some way above the 10-year average of 18 per ‘manageable’ – i.e. not too high given the weak market survey. Developers clearly remain focused on delivery conditions – there remains a very real concern about the of additional office space into the London market over depth and breadth of tenant demand. For every deal that the next 18 months and, indeed, our research suggests completes there seems to be another that fades away. further new starts are imminent across central London. Corporates remain clearly focused on defensive balance sheet strategies: our latest CFO Survey shows that The trend identified in the last survey, of refurbishments increasing cash flow, cutting costs and reducing leverage being favoured over ground-up new construction are now stronger priorities than at any time in the last continues with 15 of the new starts being refurbishment three years. Delivering the right space at the right price, in projects. The average size of development started the right location remains key. in this survey has fallen to 62,000 sq ft, 40% below the average size seen six months ago. Principally, this is a result of the number of refurbishment schemes recorded or conversely the low number of larger new builds starting, reflecting an appetite for less risk. Refurbishments now account for 25% of all space in development. Market by numbers new construction Total available space under construction down ‑ 4.2% 25 starts Construction activity of office space up on a year by 9m sq ft under construction 26% Completed office of space being developed space in the past 25% is refurbishment space six months totals 1.7m sq ft Crane Survey London Offices Winter 2012 3 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. The City The City is one of only three markets to record an increase in construction activity over the last six months (the others being King’s Cross and Midtown). The total level of office space now under construction has risen to 4.1 million sq ft, a 30% increase on the same point last year and the first time it has risen above four million sq ft since Q1 2009. Construction levels have been bolstered over recent The largest of these is MGPA, CarVal and Quadrant’s years by developers looking to refurbish existing joint venture at Moorgate Exchange, 72 Fore Street, buildings rather than demolish and rebuild. This route with 220,000 sq ft scheduled to complete at the start of is often quicker and cheaper with sites with a frame 2014. Moorgate Property Unit Trust has started works that can be reused. This trend continues in this report on 138,000 sq ft at 8-10 Moorgate and Viridis Real with six of the nine new starts recorded this survey Estate have commenced construction of 67 Lombard being refurbishments. These include QV Unit Trust’s Street. The addition of these schemes in the pipeline 187,000 sq ft at 71 Queen Victoria Street and its brings the total volume of floorspace in new builds to next door neighbour, CBRE Investors’ 30,000 sq ft just over 3 million sq ft of the 4.1 million sq ft currently at 77 Queen Victoria Street, while, Great Portland being built. Estates and Starwood Capital have started on the significant refurbishment of 80,000 sq ft at City Tower, While construction levels continue to increase, the 40 Basinghall Street. All of these are scheduled for decision to defer many scheme starts during 2009 and completion in 2013. Of the current construction activity, 2010 means that completions remain low. With just refurbishment schemes now account for 14 of the 458,000 sq ft delivered in the year so far, and with only 27 schemes being built in the City. 260,000 sq ft scheduled to finish before the end of December, 2012 is set to have the lowest level of office Despite being less numerous, new build schemes are completions in the City in over 25 years. 2013 will see generally larger and, indeed, the bulk of the floorspace completions begin to increase again with 1.5 million sq ft that has started in this Crane Survey is attributed to scheduled to be delivered and in 2014 it will jump to three new build projects. over 2 million sq ft with the completion of 20 Fenchurch Street and The Leadenhall Building. Development pipeline Million sq ft 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Completed Available U/C Let U/C 4 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Of the five schemes that have finished in this survey, two The City – volume under construction % have already been let. The Nationwide Building Society have taken the entire 49,000 sq ft at SEB Investment’s refurbishment of 1 Threadneedle Street, while Odgers 25% Berndtson have also taken the entire building at the Allied London & Aerium scheme, 20 Cannon Street. Since the last Crane Survey, Land Securities and Canary Wharf Group have achieved lettings at their 20 Fenchurch Street development to insurers Markel 75% International and RJ Kiln Group, who will occupy a combined 130,000 sq ft of space with further deals nearing completion. Let U/C Available U/C However, while some landlords are letting space, others in the City are finding it more challenging in an environment where the traditional mainstay of The City – Number of new starts per crane survey demand, the financial sector, is largely in retreat. A large floorplate in a ‘financial building’ may now attract 13 limited interest and so be priced competitively, whilst a smaller floorplate in an ‘insurance building’ may attract a rent that is 10-20% higher for space of a comparable 9 quality. This difference in pricing makes it difficult to attach just one prime rent for the City. 7 5 The 27 schemes currently under construction in the City are entering a market very different from just five years ago. The dynamics have shifted, from the type 0 of tenant active in the market, the rate in which deals 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 are undertaken, the amount of space required by these tenants and the location and specification of that space. Market by numbers new construction Total number of 9 starts development schemes 27 Construction activity of office space up on a year ago by 4m sq ft under construction 30% Completed office of space being developed space in the past 24% is refurbishment space six months totals 305k sq ft Crane Survey London Offices Winter 2012 5 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below.