Speculative construction has risen even further in London but the pace of increase has slowed dramatically. However, this will not stop rents falling.

Once again the highly cyclical London market has left developers wondering where they are going to find tenants for their new buildings. The change in market conditions from this time last year has been extreme. With the credit crunch choking off tenant demand and 10.7 million sq ft of speculative space under construction (up 15% on the last survey), the conditions for property investors and developers will be challenging.

But this is really a City story and it will be relatively short term – like a single tidal wave, painful and damaging but with a foreseeable end. The non-City markets are more robust with wider-based demand and less supply; but declining rents in the City will ripple out across London.

So where is the good news? Well, many developers have now turned off the tap on new schemes which means undersupply in 2011-2012. This creates opportunities for developers who are now able to buy at lower land values due to the weakened capital markets.

The timing of the credit crunch could not have been much worse for the City office market. Weakening demand comes at the same time as construction activity is at its highest since the early 1990s. This will translate into more choice and lower rents for occupiers who have been at the mercy of the landlords for some time now. However, there are some positives for developers as well, such as the forecast short length of the downturn and lower volume of ‘grey’ space.

Outside the City market developers can be more upbeat. In general building activity remains more constrained. Demand is expected to weaken but rents should hold up better. However, history shows us that London is never immune from the drag of the City market and falling Square Mile rents mean rents will fall across all the London markets.

The positive message for developers to take away (yes there is one!) is that we expect this rental downturn to be a relatively short one. New start shave slowed considerably in the latest survey from 46 new developments to 26. We expect this trend to continue into the next report - our research shows that few London developers are confident enough (or can secure the funding) to develop into 2011/12. Once the overhang of supply is absorbed, the market will once again become undersupplied and then start showing positive rental growth. This, in conjunction with more realistic prices for sites and standing investments means that now is the time to start planning for the next London cycle.

Read the full Drivers Jonas article below:

Crane Survey - Central London PDF