UK Commercial Property Construction Hits 11 Year Low as Costs Rise and Uncertainty Bites

Construction activity across the United Kingdom’s commercial property sector has dropped to its lowest point in over a decade, as surging costs and widespread economic uncertainty weigh on the market. According to new data from CoStar, overall construction for offices, retail spaces and warehouses fell by 21% to 5.85 million square metres in the third quarter compared with the previous year, the smallest volume since 2014.

The sector faces significant headwinds, including rising costs for raw materials and labour driven by skill shortages. Heightened interest rates, persisting since the onset of Russia’s invasion of Ukraine in 2022, and declining values of commercial properties have combined to deter investment and slow new project starts. Even with several rate cuts from the Bank of England in the past year, borrowing costs remain well above the low levels following the 2008 financial crisis, negatively impacting the appeal and returns from property investments.

Official figures point to this year becoming the weakest for construction starts since the turn of the century. Compounding the challenge is the simultaneous slowdown in housebuilding, a worrying trend for the Labour government, which set itself a target of 1.5 million new homes over five years.

The uncertainty over asset pricing, volatile geopolitical conditions and elevated bond yields have deterred investors, particularly in the office market. However, the report notes a number of large office deals remain in the pipeline for London, offering a potential uptick in activity through the close of the year.

Despite the construction slowdown, demand for office space in the UK showed a marked increase, rising by 24% year on year in the third quarter to around one million square metres. London led this recovery, with take-up climbing 34% to the highest level seen since 2018, buoyed by several major lettings over the summer. Outside London, however, demand for workspace continues to ease.

Office vacancy rates have stabilised at 8.8%, the highest in thirteen years and nearly double pre-pandemic levels, though the vacancy rate in London is slightly higher at 10.7%. In the warehouse sector, vacancies now stand at 5.5%, more than double the rate seen in mid-2022, as a recent surge in completions outpaces stagnating demand following the cooling of the pandemic-driven online retail boom.