The commercial sector is recovering but don’t expect to see lots more Shards and Walkie Talkies. The way we do business has changed and what we build has to reflect this
The latest issue of the Drivers Jonas Deloitte London Crane Survey finally confirmed that, at least in London, the commercial sector has moved into recovery.
The “race for space” is off and running, with 25 schemes starting on site in the past quarter alone. This will come as no surprise to consultants and contractors active in the sector, as developers have been dusting off schemes for over nine months. However, the scale of the increase in new space under construction - up from 2.7 million ft2 to 6.4 million ft2 - was surprising. Lacklustre new orders data for the commercial sector from 2010 provided no indication of this leap in activity, remaining 50% below volumes seen in the golden years of 2006 and 2007.
Just as striking as the speed of recovery are the buildings that are back in the pipeline - 20 Fenchurch Street, Leadenhall Tower and The Pinnacle are all reported to have started last quarter, contributing nearly 1.3 million ft2 of floor space under construction. London will get its world city skyline by 2014 and hopefully the developers of these schemes will get rewards from their early-mover advantage.
London will get its world city skyline by 2014 and hopefully the developers of these schemes will get rewards from their early-mover advantage
But is it really business as usual? Are these tower designs the face of future development or an echo of the past? We think the latter, and the drivers are not just economics either - user needs and preferences are playing a part too. The back to basics agenda reflects changes in business and the workplace as well as shifts in supply and demand.
Tall buildings take an age to design and construct, so often their construction and impact on market expectations will span development cycles. Smaller ground-scraper schemes that are easier to finance, faster to develop and more responsive to market conditions will have a competitive advantage and give a better indication of where development trends are heading.
The first trend is refurbishment - often lower cost and lower risk, and enabling space to be delivered into markets faster than a new-build project. There is an increasing number of these projects on-site in London, providing high-quality and sometimes characterful space. In some locations, proposals to reposition office buildings as high-quality residential will have the effect of taking existing office space out of the market, creating further opportunities for new builds.
The other key trend is the shift towards development focused on building and occupier performance rather than volumes of generic, institutionally specified space. There is more to this than a journey from “vanity to sanity”; it reflects further evolution in the way in which development is becoming more customer-focused. Developer-driven innovation in the last cycle was often aimed at delivering iconic buildings that maximised value to highly leveraged investors through advantageous planning consents. By contrast, we expect to see future innovation aimed at delivering affordable, differentiated workplaces that not only support business performance and occupiers, but also provide long-term assurance of value to their owners.
We expect to see future innovation aimed at delivering affordable, differentiated workplaces that provide long-term assurance of value to their owners
The drivers for this change are complex and interlinked. Many businesses have already delivered their cost-reduction programmes, and smart occupiers will recognise that the next step should be to focus on the long-term contribution of office space to business performance and brand. These businesses will want to lease buildings that deliver performance based on flexibility, good working environments and low cost, low carbon operation. “Lifts, loos and views” and Part L compliance may not be enough to cut the mustard for savvy tenants in 2013/14.
At the same time developers are responding to their changed business environment: certainty continues to be critical so innovation needs to be managed with care. Investors continue to rely on long-term asset performance, becoming increasingly sensitive to factors that differentiate buildings over time such as operating costs or EPC ratings. Given constraints on funding, smaller, phased projects with an accelerated cashflow may prove to be a more palatable and deliverable option, even though they do not deliver the maximum potential value of a site.
Location, timing, good fortune and design and construction excellence continue to be essential ingredients for successful commercial development - particularly in a market as challenging as today’s. Developers that succeed in marrying these attributes with value-adding innovation and customer focus are likely to be well represented in the Crane Survey as the new cycle gains pace.
Simon Rawlinson is head of strategic research and insight at EC Harris