I must admit to being a bit dense. The UK Times tells us that a large amount of spec office development in London is likely to be mothballed and some may even be cancelled.
What has me puzzled is why this shift is happening now. The credit contraction started in early June, went into its first acute phase in August, its second in November, its third in March. It seemed pretty obvious as of last fall that we were going into a cyclical fall in employment in trading and broking, perhaps with a secular component on top of it. I don’t know what the pattern in the City is, but in Wall Street, peak to trough job losses are typically 20% (the dot-com bust was actually less severe than the norm).
So why has it taken this long for projects to start to be shelved? Is it simply unsinkable developer optimism, or are there more nefarious factors at work (like certain parties might benefit from keeping the projects alive as long as possible, and thus fan false hopes?)
From the Times:
Plans for more than eight million sq ft of speculative office buildings, including a clutch of skyscrapers, could be shelved as the financial sector retrenches and cuts its demand for space in the City of London.
The impact of the credit crunch on financial institutions, the City’s biggest employers, is blamed for the sudden drop in demand and developers are reigning-in plans for space equivalent to more than a hundred football pitches after four years of increasingly ambitious construction.
British Land confirmed yesterday that it would delay the so-called Cheesegrater, a 225 m (740 ft) high tower on Leadenhall Street, in the hope that its completion would coincide with the peak of the next commercial property cycle. Other developers are expected to delay projects scheduled to start in the next 18 months at least until they have found prelet tenants….
According to City analysts, as much as 8.4 million sq ft of planned speculative office development could now be shelved or at least postponed and 3.5 million sq ft has a question mark over it. The downturn in the financial sector has coincided with more speculative space than ever coming on to the City office market. About 3.26 million sq ft of new unlet space is due to be completed this year, while several hundred thousand square feet of “grey space” – let, but still empty – is expected to be put back on the market.
“like certain parties might benefit from keeping the projects alive as long as possible”
I’m pretty sure builders have to build buildings on purchased land in order for it to be considered inventory — aka monetize it. If they don’t monetize the land, banks yank loans and everything falls apart. This is true with US resi builders…PHM, CTX, DHI, LEN, etc. They are exacerbating the problem of too much supply by continuously building inventory into one of the worst resi markets in history.
Keeping the project active, even if it’s on life support, can still provide revenue. That said, yes – of course they knew how things were starting to slide.
Irrational exuberance. But I think mxq cuts close to the bone on this, though: once the developers have the loan in hand, they have every incentive to take the money and dig. To me, they only quit if and when either the bank brakes the plunge (using things like lack of tenant commitments) or co-investors get icy toesys (“You mean I’m going to have to HOLD this empty tub for _four_ years??”). I suspect that the latter is more the issue in the City, but that’s just the spec of a hunch.
Agree with Richard Kline. Some local colour with extra pointers: when JPM bought BSC they also picked up BSC's 90% built London HQ at Canary Wharf. It took JPM 4 months to decide that they really didn't need to build a big new building on London Wall. The developer took a £17Mn hit on that decision.
Planning rules in the City are fantastically complex (eyelines to St Paul's influenced the Cheesegrater's shape & others) and designing aroung them drives up the upfront costs. Developers would be reluctant to write those expenditures off until they had to.
So: dollops of space already available, but big sunk costs in plans.
Guess: banks now have their business and staffing plans together for next year; the developers got first look and canned their developments; next step (soon): soem serious job cuts.
Link to Time piece in the post is as duff as my typing – sends us to the Indie
You have a similar situation in some parts of the US.
They are still doing a lot of commercial building (hotels, offices,etc.) in the Carolinas.
If you project the current economic conditions within North and South Carolina (not too bad) that makes sense. You have to view that a downward trend is likely to stop all of the projects.
So you have some projects on hold, but many going forward depending on where they sit in the development cycle, and what the sum world view of the decision makers is.
Another guess at an explanation might be that the developers creditors, realizing that if the projects ended they would realize losses, and conversely still drinking the kool aid of the glory of risk free lending, made it palatable for the developers to continue work, by reducing or restructuring their loans.
That would be my guess, but I don’t know jack about british bankers ;)