Decline in Office Project Starts and Contract Awards: A Mixed Bag for the Development Pipeline

The latest data on office construction in the UK reveals a complex landscape, marked by a significant decline in project starts and main contract awards compared to both the previous quarter and the previous year. However, amidst this downturn, there is a silver lining: detailed planning approvals have seen a notable increase, suggesting a robust development pipeline for the future.

Overview of Office Projects

During the three months leading up to September, the total value of office work starting on site reached £1.125 billion. This figure represents a staggering 62% decline from the preceding quarter and a 40% decrease compared to the same period last year. Major projects, defined as those valued at £100 million or more, experienced an even sharper decline, plummeting by 80% against the previous quarter and standing 45% lower than a year ago, totaling £405 million.

In contrast, underlying starts—projects valued at less than £100 million—also fell, though not as dramatically. These projects saw a 33% decline compared to the previous three months (seasonally adjusted) and were 37% lower than the same period last year, totaling £720 million.

When examining main contract awards, the total value reached £1.377 billion, reflecting a 17% decrease from the previous quarter and a 32% drop year-on-year. Major projects accounted for £867 million during this period, marking a 13% decrease from the preceding three months and a 5% decline compared to last year. Underlying contract awards faced a more severe downturn, declining by 25% against the previous quarter and by 58% year-on-year, totaling £510 million.

Planning Approvals: A Positive Trend

Despite the downturn in project starts and contract awards, detailed planning approvals for office projects have shown resilience. With a total value of £3.083 billion, approvals increased by 6% compared to the previous quarter and by 8% year-on-year. Major project approvals, while down 8% against the preceding three months, rose by 14% compared to last year, totaling £1.727 billion. Underlying project approvals also saw a positive trend, increasing by 28% (seasonally adjusted) against the previous quarter and by 1% year-on-year, totaling £1.357 billion.

This increase in planning approvals is a promising indicator for the future of the office sector, suggesting that while current project starts may be down, there is a pipeline of potential developments waiting to be realized.

Size of Office Projects

A closer look at the size of office projects reveals varying trends across different value bands. Starts in the ‘Over £100 million’ category decreased by 45% year-on-year, totaling £405 million. The ‘£10 million to £20 million’ band also saw a significant decline of 41%, totaling £171 million. Meanwhile, the ‘£50 million to £100 million’ category slipped back by 22% year-on-year, amounting to £169 million.

Smaller projects also faced declines, with the ‘Up to £5 million’ band decreasing by 11% to £167 million. The ‘£20 million to £50 million’ category experienced the most significant drop, falling 60% year-on-year to total £124 million. Lastly, starts in the ‘£5 million to £10 million’ band faced a 38% decline, totaling £89 million.

Regional Insights

Regionally, London remains the most active area for office starts, accounting for 41% of the total value during the three months to September, despite a 62% decrease compared to the previous year. Office work starting in the capital totaled £459 million, with the £200 million Holborn Viaduct project in The City helping to mitigate further decline.

In contrast, the East of England experienced a staggering 89% slump compared to last year, with project values totaling just £35 million, representing 3% of the office sector. On a more positive note, the South East saw a remarkable performance, with starts growing by 156% year-on-year to reach £199 million, accounting for 18% of the sector. The North West also performed well, tripling its project starts to total £175 million, while Yorkshire & the Humber saw a sevenfold increase, totaling £119 million.

Planning Approvals by Region

When it comes to planning approvals, Scotland led the way with the largest share, accounting for 28% of the total with a value of £859 million—an impressive increase of nearly seven times compared to last year, largely driven by the £850 million Buchanan Galleries project in Glasgow. The South West also experienced growth, increasing by 36% to total £256 million, representing an 8% share of office consents.

Yorkshire & the Humber mirrored this growth, increasing by 34% to total £233 million, while the East of England saw a 27% increase year-on-year, totaling £196 million and accounting for a 6% share of approvals. Conversely, London, which accounted for 26% of approvals, slipped back by 54% against last year, totaling £808 million. The North West also experienced a decline, falling 12% year-on-year to account for a 6% share of consents, totaling £192 million.

Conclusion

In summary, the current state of the office construction sector in the UK presents a mixed picture. While project starts and main contract awards have decreased significantly, the increase in detailed planning approvals offers a glimmer of hope for future developments. As the market navigates these challenges, stakeholders will need to adapt and strategize to capitalize on the opportunities that lie ahead. The resilience shown in planning approvals indicates that while the present may be challenging, the future could hold promise for the office sector.