Savills highlights global development viability challenges in office market
Savills says that while rents have increased by an average of 13% for prime offices globally since 2020, the office delivery pipeline to the end of 2027 is now compressed, especially in the US and Europe where it is now barely 8.9 million sq ft in the former and 24.2 million sq ft in the latter.
In its Impacts thought leadership programme, launched today 4 June, Savills says that cost inflation, labour shortages, elevated borrowing costs and increased regulation are undermining the viability of new projects, alongside economic and geopolitical uncertainty weighing on consumer and investor confidence.
Although every office development is different, Savills has taken three global cities as a proxy and calculated that, in the current climate, the gross development value (GDV) of an average office development in New York will need to be approximately USD $3,100 per sq ft, in London USD $1,650 per sq ft, and in Seoul, USD $1,370 per sq ft, in order to be viable. This is based on sample average comparing the total project costs – for example, land and construction, professional fees, financing and the profit margin – with the potential income from a project.
“Commercial development viability in London and in many other locations around the world is being shaped by an exceptionally thin pipeline, with very little speculative activity as the risk-reward balance remains difficult,” says Simon Collett, executive director and head of Savills Building and Project Consultancy EMEA. “Instead, many owners are refurbishing existing stock to create a new prime standard.
“While build cost inflation continues to see upward pressure, uncertainty also remains a significant concern. In this environment, mitigating risk goes beyond the numbers: robust procurement strategies, strong contracts, trusted partners and a resilient supply chain are critical to making sure projects get off the ground.”
Kelcie Sellers, associate director, Savills World Research, comments: “For office development, viability depends heavily on location. Schemes in the best-of-the-best markets globally remain viable, supported by a constrained short to medium-term pipeline and strong rental growth prospects which makes the GDVs stack up. For those elsewhere, the projects that are being delivered are those that invest early in master-planning, infrastructure and robust phasing, curate strong ecosystems and plan and bring the right public sector partners, private capital, institutions and end users to the table from the outset.”