Revival in planning approvals points to upturn in office construction

Economic uncertainty and the danger of a hard Brexit continue to hang over the commercial office sector, particularly in London. However, a sharp revival in planning approvals in the first half of this year suggests sentiment in the sector may have turned and an upturn in office construction is on the horizon.

Glenigan construction data shows the value of new work starts in the office sector remains subdued, having fallen 20% in UK in the first six months of 2018, compared to the period last year. But the new work construction pipeline looks more promising; the value of detailed planning approvals for underlying office projects climbed by 56% in the first half, compared to the period in 2017.

The upturn in first half office project approvals was particularly strong in the North West (up by 238%), the North East (151%), the West Midlands (165%) and the South West (139%). Even London, (where approvals rose by 85%) and the South East (up 35%) saw signs of a revival in tender opportunities.

Shortage of space

One factor boosting the potential construction work pipeline is a shortage of Grade A office space. A recent report from Savills noted that the total availability of office space continues to fall and that Grade A availability stands at 10 million sq ft but much of it is in London. Outside the M25, there is just 18 months’ supply of Grade A space. Large government property unit deals have been one of the largest sources of the ‘take-up’ of space recently and after a 3.3% rise in top rents in regional cities in 2017, a further 1.8% rise is expected this year.

Much of the new office space currently being built is already pre-let and Savills points to a scarcity of speculative development. Around 561,000 sq ft of speculative space is set to be completed during 2018.

Meanwhile, a recent positive report on the office market in UK regional cities from Knight Frank highlighted other drivers of occupational demand. It says firms are becoming more mobile in their search for the best-located office spaces and workforce. Increasingly they recognise that low-cost, low quality property is a false economy which encourages staff ‘churn’.

The arrival of new technologies, particularly automation, AI and robotics, means firms’ back and middle office functions often need to be re-shaped to accommodate more technical and creative staff. The spread of co-working in flexible, shared office space in the regions is also creating demand for more space and tender opportunities.

Opportunities in the regions

The opportunities for new construction work in the regional office sector are reflected in Glenigan Construction market data. It shows work recently starting on a £4.5 million Grade A office scheme at Didsbury Technology Park near Manchester, with work set to continue for 15 months (Glenigan project id 18223657).

Meanwhile at Unity Square in Nottingham, outline plans have been granted for a £100 million scheme of 450,000 sq ft of Grade A office space with a new hotel and retail and leisure space being developed by Peveril Securities. Construction work is set to start in mid-2019 (Glenigan project id 07024961).

Offices also form a key element in the £100 million Salterns Harbourside Hotel development in Poole (Glenigan project id 14290653) which is at the pre-tender stage and where work on the 24-month contract is set to start early in 2019.