London office developers putting net zero goals on the backburner

London office developers are putting their net zero goals on the back burner following a slump in leasing demand this year, according to Deloitte.

Over half, 54%, of respondents to the firm’s latest crane survey for the six months to September said their developments would only reach net zero after 2030, compared to 70% saying they were aiming for 2030 or earlier in the same period last year.

It comes amid indications that the sustained period of optimism in the wake of the covid-19 lockdown has turned into growing caution about the outlook for the capital’s office leasing market.

Nearly half, 45%, of developers reported softening demand during the six-month period with just 36% saying it had improved. 

Some 70% said they expect the shift to hybrid working will reduce the overall requirement for London office space per head by 10% in the short-term compared to pre-pandemic levels.

Deloitte partner and real estate climate and sustainability lead Philip Parnell said: “Net zero targets and legislation to support the commercial case for net zero development remain unclear and it remains to be seen whether the current macroeconomic headwinds will stifle progress.”

More than a quarter, 27%, also said availability of funding had become an issue, compared to none in the previous survey, amid a rise in interest rates, energy bills and tender price inflation.

Real assets advisory director Sophie Allan said construction costs are likely to remain a major challenge in the near term. “Likewise, rapidly increasing debt funding costs will continue to weigh on scheme viability where sites have already been acquired. This, along with inflation in tender prices, will put pressure on land prices going forward,” she added.

But Parnell said that pressure from occupiers and investors would continue to force a shift to greater sustainability from developers in the long term.

The survey found significant growth in refurbishment projects, which are being made more attractive by the financial risk of new build schemes and sustainability concerns around demolition.

Refurbishments accounted for 26 of the 31 new project starts during the survey period, with a concentration of activity being reported in the City, West End and Midtown areas of the capital where there is a large stock of existing office buildings.

Margaret Doyle, chief insights officer and partner for financial services at Deloitte, said the past year had been characterised by an uptick in post-pandemic refurbishment activity.