The UK office construction sector has reached a notable low, with data revealing a sharp decline in activity that has not been seen in a decade. According to the latest figures from CoStar, a leading provider of commercial property research, the amount of office space under construction in the UK plummeted to approximately 23 million square feet in the first quarter of 2023. This marks a decrease of more than 3 million square feet compared to the previous year and represents the lowest level of construction since early 2015. This downturn signals hesitance among developers, who are grappling with ongoing economic uncertainty and persistently high costs, particularly in financing.
The findings emerge amid broader challenges facing the construction industry in the UK. The economic landscape is increasingly complex, with many builders opting to adopt a wait-and-see approach as they navigate high interest rates and escalating construction costs. “Developers are pausing for breath amid economic uncertainty and the persistently high cost of debt and construction,” noted CoStar in anticipation of a more detailed report set to be released shortly.
This decline in construction activity presents a significant setback for government initiatives aimed at stimulating economic growth through a renewed emphasis on building and infrastructure development. A recent report from S&P Global highlighted that construction activity fell at the steepest rate since May 2020, with the housebuilding sector particularly affected by diminished demand stemming from low consumer confidence and lackluster economic performance.
However, the analysis also draws attention to a divide in office construction activity across different regions. The London area and the Oxford-Cambridge tech corridor remain relatively vibrant amid the broader downturn. Together, the cities of Oxford and Cambridge are witnessing approximately 1.8 million square feet of office space under construction, fueled by strong demand from university spinoffs and established technology enterprises. In London, around 12 million square feet of office space is currently being developed, featuring high-profile projects such as One North Quay, a dedicated life sciences research and development facility in Canary Wharf, and the ambitious construction of an additional 650,000 square feet of office space at 50 Fenchurch Street.
The demand for office space in London is evidently being driven by large companies that prioritize “Grade A” buildings equipped with amenities designed to attract employees back to physical workplaces following a shift toward hybrid work models. These new features include fitness centers and yoga rooms, underscoring a cultural pivot within the workplace as firms seek to create environments that foster well-being and collaboration.
Contrastingly, regions such as Liverpool, Bristol, and Glasgow show minimal or even no ongoing office construction. The relatively high vacancy rates in these markets for Grade A properties have led to developers holding back on new projects, indicating a lack of confidence in the commercial viability of such investments in the face of an already saturated market.
The labor market in construction, long a topic of concern for industry stakeholders, also continues to pose challenges. Leona Ahmed, a partner at the law firm Taylor Wessing, emphasized that workforce shortages are compounding these issues. “Post-Brexit, we’ve seen a substantial number of individuals who traditionally occupied roles in the construction sector exit the UK,” she stated, highlighting the manpower struggles the industry currently faces.
Regulatory changes are adding another layer of complexity to the sector. Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (RICS), pointed out that stringent environmental regulations associated with office building development are influencing both investment decisions and construction timelines. “Despite the government’s fervent desire to see Britain building, numerous factors are currently hampering that goal,” he noted.
Looking to the near future, CoStar’s report does offer some optimism, indicating that construction orders seen in the first quarter of this year have reached a three-year high, according to data from the Office for National Statistics. Yet, the analysis cautions that any meaningful increase in building activity is “unlikely to rise significantly in the short term.” This sentiment reflects ongoing caution in light of prevailing economic conditions and a fragile consumer market that may ponder the sustainability of new developments.
In response to the situation, the UK government’s housing department has underscored its commitment to fostering growth through decisive measures, including the introduction of a planning and infrastructure bill coupled with revisions to the national planning policy framework. Whether these initiatives will successfully stimulate construction activity in the near term, however, remains to be seen.
As the landscape of the UK office market continues to evolve, industry experts and regional developers alike will be closely monitoring both local and national economic indicators. The interplay of labor availability, regulatory requirements, and shifting demand dynamics will be pivotal in shaping the future of office construction in the UK, and stakeholders may need to adjust strategies in alignment with emerging trends and challenges.