Hot topic: Offices

“We are experiencing the start of an upturn in the office market that is based on a small number of larger pre-let agreements that are currently under negotiation,” says Barry Hayden, sector head for Davis Langdon’s office fit-out group. “The larger projects will not start to come through for another 12 to 18 months, at which point the current capacity in the market place will be taken up. A number of corporates are now looking at their investment programmes in a positive light, which indicates that they are looking at potential increases in head counts.”

The central London office market is definitely coming back to life with one or two significant lettings recently announced and developers dusting down mothballed schemes and looking at development opportunities. Although there is a substantial amount of grade A office space available in the City, West End and Docklands areas, it is likely that prime sites will continue to be progressed through planning as there is growing optimism that demand for central London office space will return by 2006/08, which may fuel speculative development by the end of this year or 2005.

Paul Allen, sector head Davis Langdon’s central London offices group, says: “Developers tendering schemes over the next few months will get the benefit of some keen cladding and M&E prices as these trades struggle to fill order books, but this good news will be tempered by continuing increases in steel prices.”

In the fit-out sector market, office take-up rates continue to be very depressed and although recent surveys have indicated an increase in letting activities for the first time since 1Q01, the lag between decision making and construction activity has meant that 2004 has largely remained a depressed market with prospects not expected to take a significant upturn before 2005/06.

In London, particularly, and even to some degree in the north, the fit-out market is still very competitive with contractors actively looking for work. A common feature of the market is the willingness of both main contractors and subcontractors to offer a discount to win projects. One fairly significant player in the fit-out market has gone into liquidation this year as a consequence of very tight margins.

Regional markets

North-west

In the North some contractors have declined to tender for work, citing overcapacity. Requests for an additional one or two weeks to tender are commonplace. Except perhaps for the fit-out market, contractors are able to be selective in the jobs they are targeting to win and applying “cover” principles to others, leading to a widening of the spread of tenders received in competitive lists.

There are major shortfalls in skilled operatives in all the major trades but bricklayers and plumbers remain the most scarce, continuing to drive up rates.

South-west

Workload available in the region is such that all contractors are generally busy, enabling them to pick and choose the projects they are genuinely interested in securing. This means the less attractive projects will demand even greater premiums before being built.

Expected profit levels are now much higher than in recent times and preliminaries as a percentage of total cost are now higher, often up to 18-20% on small projects, as the effect of increased site management salaries and soaring insurance premiums kick in.

Wales

Market conditions in Wales, particularly South Wales, are very similar to the above. Certain works packages, such as drylining and carpentry, are becoming difficult to tender. Some contractors are simply declining to tender but requests for additional time for tendering are frequent.

Profit levels are now generally up at about 5%, the recovery level now sought by contractors’ management boards.

As in many regions, the availability of bricklayers remains a major problem and good concrete gangs are also in short supply.

Major projects such as St David’s retail scheme in Cardiff, the Sports Village and Cardiff City’s Athletics Stadium should ensure that capacity usage in South Wales remains high in the short term at least.

East

In the East Midlands and East Anglia, most of the comments above could equally apply. Contractors with full order books decline to tender or are at least selective in the projects they consider and requests for extra tendering time is almost the norm. Negotiated or two-stage tendering is the procurement route of choice, enabling profit margins to climb.

As noted above, preliminaries costs have risen even more than permanent works costs, and percentages of total works costs, especially on refurbishment projects, are now higher.

Shortages continue to be reported in all building trades, but prices for mechanical and electrical works are increasing faster than most other trades.