The Swiss Re tower is going to be a fine skyscraper, but as demand for offices in London cools, 250,000 ft2 of it is still unlet. The forecast? Developers are going into hibernation and any contractors caught out in the open are in danger of severe exposure.
A landmark is taking shape in the city of London: frame by frame, floor by 41 floors, Foster and Partners' Swiss Re tower is going up. But despite its architectural brilliance – it is the first skyscraper without a single straight edge – it may yet prove a commercial failure. The tower will contain almost 500,000 ft2 of prime office space, and Swiss Re is to occupy half of it in early in 2004. That leaves a lot of space to fill – and in the present climate, selling office space in the City is like selling ice cream in December. Rents have fallen 4% in the past three months.

"I'm not sure the construction industry has quite got that message yet," says one leading developer. "The market's gone very flat; it's dead. Some people are working on schemes that are not going to happen unless the market picks up."

If the industry is really unaware of this, then it has not been listening to Hammerson. The developer announced its results to the City on 28 August, accompanied by the following statement: "Demand for office space in central London reduced in the first half of the year, with occupiers cautious about entering into commitments and some businesses seeking to sublet space, particularly in light of the continued weakness in many financial markets."

After the announcement, share prices dropped across the property sector, and Hammerson's phones rang with calls from fellow developers, furious that the cat was out of the bag.

Causes …
Anyone working for a publicly listed company will not need reminding why so much office space is empty – last week, the stock market hit a six-year low. The invariable response of the financial sector to lower trading volumes is to shed thousands of jobs, with the result that the vacancy rate for central London is 10%.

Another factor is the depression in the IT and telecoms sector. A number of companies have closed – the most spectacular being WorldCom – and this has freed up cheap office space along the M4 corridor between London and Reading.

The sales and marketing director of a major fit-out contractor says: "The demand from the IT and telecoms market has more than halved in the past two years. In 2001 it was 25% of all offices – now it's in single figures."

… effects …
Against that backdrop, office orders in the South-east were down one-fifth in the first half of this year, according to figures from the DTI. And activity is unlikely to pick up any time soon. David Hunter, chief executive of Aberdeen Property Investors UK, says: "You'll see no speculative development for 18 months; there will still be some purpose-built work, but I think that may be a little subdued."

That means, as Hammerson's statement implied, that developers are putting their plans on hold. David Wasserburg, an associate at LaSalle Investment Management, which advises clients on property development, confirms that "a lot of people" are postponing plans to go on site.

We’re working on 25 projects in the West End and the City, but none of them is going on site

Charles McBeath, Whitby Bird & Partners

The highest profile casualty – literally – will be all the skyscrapers proposed for the City. These will almost certainly not get built for many years – unless, like the 37-storey Heron Tower, which got the green light in July, they are pre-let.

… and the consequences for construction
The knock-on effect is hitting contractors such as Liam Duffy, a London-based managing director at Mansell. He says: "We've got contracts that have been awarded, then postponed to 2003. The volume of enquiries has dipped a lot over the past six to eight weeks – it's never been this low."

Consultants are feeling the effects, too. Charles Johnston, chairman of quantity surveyor MDA, says: "We're finding it quite quiet. Some schemes are sitting around waiting for the go-ahead. But I'd say people are being cautious – it's not an out-and-out downturn." The same applies to engineers. Charles McBeath, a director at Whitby Bird & Partners, says: "Anyone who earns their money predominantly from commercial office work will find next year pretty tough. We're working on 25 projects in the West End and the City, but none of them is going on site."

With the office market in the doldrums, contractors, engineers and QSs are pursuing the same strategy: a dash to the shelter of the public sector. "We have eggs in a number of baskets," says Mansell's Duffy. He reels of a list of schools and key worker housing, and concludes: "We're not relying on the commercial market."

Bill Watts, a partner at consulting engineer Max Fordham, makes the same point with an ominous metaphor. He says: "It's like with the dinosaurs. They became extinct because they were specifically adapted to one environment, but mammals survived because they were adaptable." Today, he says, firms that operate across several sectors are like mammals; those that rely too much on the office market are like dinosaurs.

So how bad is it?

Within the office market, there is still work available, but firms have to look beyond new build to find it. "We've noticed a change in the type of application we receive," says Peter Rees, chief planning officer for the Corporation of London. "In a boom, people are more keen to knock a building down and start again; in a recession, they do more refurbishment." MDA's Johnston adds that his firm has seen an upsurge in consolidation work, as a result of companies rearranging their office to accommodate a diminished workforce.