Refurbishment is dominating the London office sector, according to the Deloitte London Crane Survey

The Deloitte London Crane Survey has once again revealed that commercial property developers are showing a propensity to renovate existing offices instead of constructing new ones as they seek to meet occupier demand for eco-friendly buildings whilst navigating the slow planning system and tightening green legislation.

The latest issue of the bi-annual survey has highlighted a continued shift towards refurbishment in the London office market, with landlords opting to invest heavily in renovation or upgrade projects in order to create quality, efficient spaces in prime locations.

In the six months from October 2023 to March this year, refurbishment work commenced on 2.3 million sq ft of office space in the capital, nearly double the volume of new constructions at 1.4 million sq ft. It is the eighth consecutive London Crane Survey in which there has been a higher number of refurbishment projects starting compared to new developments.

Alongside this, Deloitte reported that there had been an 18% decrease in new development starts compared to the previous survey, but the overall volume of new projects remains significantly higher than the 10-year average of 3.3 million sq ft, with 24% of space pre-let at the point of the survey’s publication.

The results demonstrate that, despite the uncertainty they face, developers are still placing their trust in the London office market, but it is the changing needs and demands of the occupiers, alongside tightening sustainability regulations, that is driving the output. Here we explore this trend a little further.

Why is refurbishment proving to be preferable?

Major refurbishment projects can offer a sustainable and cost-effective alternative to new constructions for delivering top-tier office spaces. By redesigning the interior of a building to preserve the building’s core structure, refurbishments can significantly reduce embodied carbon, thus improving the building’s carbon footprint.

In addition, when compared to a new building of the same size, refurbishment projects frequently have shorter delivery timetables and cheaper construction costs, which is a significant consideration given the current issues the UK is experiencing in the labour market and materials shortages.

According to Philip Parnell, real estate valuation lead at Deloitte; “Through a combination of tightening planning policy and an ever-increasing focus on moving towards achieving net-zero, it is fascinating to see a continued trend of increasing refurbishment activity.”

“This underlines our previous assertions that investors should be conscious of a risk in the increase of stranded assets, where assets do not meet occupier’s ESG expectations, with the inevitable risk of value erosion.”

Location, location, location

Despite initial concerns regarding the future of office usage post COVID-19, there has in fact been a notable increase in demand for physical workspaces, predominantly in prime locations.

From a new build perspective, The City of London Corporation stated in November 2023 that as of September that year, 1,023 planning applications had been received, up from 820 in the previous year. They also reported that over 500,000 square metres of office space was still awaiting approval in addition to an equivalent amount that was also already under construction.

Refurbishment has the potential to fulfil the bourgeoning requirement for desirable office space by repurposing existing stock and making best use of existing resources, without getting caught-up in planning legislation. It is this trend that is being reflected within the London Crane Survey.

At present, rents and valuations continue to be on the rise, especially in sought-after areas like Mayfair and St. James’s due to the successful refurbishment of highly desirable listed buildings. These prime locations have demonstrated resilience amid pandemic-related construction challenges and evolving regulations. Whereas, older, less energy-efficient properties in secondary locations are struggling to attract tenants, and are often left fully or partially empty, unable to command the rents they may previously secured.

Whilst this clear desire for premium office space is guiding the market, it must be balanced against the implementation of stricter energy standards. The shift towards refurbishments has been notably hastened by the trajectory of MEES regulations and the rise of hybrid working practices in recent years, and this is likely to continue for at least the next decade, and potentially beyond, if Deloitte’s predictions are to be believed.

Developers, overall, are sharing this optimism in the market, believing they will witness a similar trend for prime London office space. In fact, the London Crane Survey revealed that nearly 90% of developers expressed that they felt the leasing market had slightly improved compared to six months ago, while the remaining respondents stated they thought that it had significantly improved.

The continued success of both new build and refurbishment is, of course, all dependent upon the economic environment, availability of funding, the lingering issues with planning, labour and materials cost, all being successfully navigated.

As it stands, the commercial property sector continues to face significant geopolitical and financial challenges. Valuations are under pressure from persistent high construction costs and timing discrepancies, along with valuation basics affecting exit yield assumptions.

But what the London Crane Survey reveals is that there is a stable occupational demand for premium office space in Central London, especially in the City and West End. And it is this promising trend that will provide a ray of hope for the sector, fostering renewed optimism for the months and years ahead.