The development of new office space stalls in the UK

The office development sector has hit a significant slowdown, with new projects reaching their lowest level since the financial crisis. High construction costs, increasing borrowing expenses, and the ongoing shift toward remote work have heavily impacted developers’ willingness to start new office projects.

According to analytics group CoStar, from April to June 2024, less than 500,000 square feet of new office space broke ground, a steep decline from the 2.9 million square feet started in the first quarter.

This marks the weakest quarter for new office construction in 15 years, and the total amount of office space begun over the past year is at its lowest in more than two decades, with only 7.8 million square feet started. Most of that is expected to be completed by the end of 2025, at which point, developers anticipate there will be a shortage of supply.

The situation is particularly stark outside London, where only one new office project began in the “Big Six” regional cities this year, located in Leeds. Our view is that developers have been holding back due to a combination of factors, including uncertainty around the general election, continued high material and labour costs, and concerns over future demand for office spaces.

The cost of building an office has risen by 30-50% over the past three years, driven both by true inflation and the demand for higher-quality office environments. High interest rates have further discouraged development, as they increase financing costs and reduce the value of commercial properties – leaving many developers pondering the benefits of starting a new office project where the required profit levels are not possible.

Despite these challenges, there are signs that the market may begin to turn around. Rents for premium, greener office spaces in prime locations are rising, particularly in cities like Bristol and Manchester, where they’ve increased by 12.9% and 10% year-on-year, respectively. This rental growth, coupled with potential easing of cost inflation and interest rates, could incentivise developers to start new projects soon, suggesting that the market may be approaching its lowest ebb, after which we may start to see the green shoots of resurgence.