Contractor challenges around increasing labour and material costs as well as project delays on the horizon despite strong rebound
Activity in the London office fit out market has returned to its pre-pandemic levels according to the latest survey by Colliers’ Cost Consultancy team.
With leasing activity restarted and office occupation increasing, demand for office refurbishments or wholescale new fit outs is back to the same level at the start of 2020, says Colliers’ latest London Fit Out Market Update. However this demand is not without its challenges as supply pressures are impacting on contractors’ ability to deliver projects on time and at a profitable rate.
Colin Wood, director of Cost Consultancy at Colliers, said: “We’re seeing there’s plenty of reason for optimism in the market. The majority of leasing requirements are from occupiers with lease events coming up or within premises due for redevelopment. Of the leasing that has happened this year 61 per cent has been to grade A stock, a significant increase on the ten-year average of 44 per cent.
“However there’s significant challenges facing trades at the moment, with some costs having increased by between 25 per cent up to 120 per cent in some cases since the beginning of the year. A shortage of skilled labour remains a challenge as well.
“The industry has always had tight profit margins, it has relied on a high volume of jobs, with a quick turnover. Given the cost pressures, many general contractors and trades are not holding prices for much more than 30 days. Those just starting out on jobs are now putting in agreements to share material cost increases over the lifetime of a project.”
As part of the twice-yearly survey, many of the contractors reported that they’re operating at on average 85 per cent capacity at the moment, but some reported higher numbers.
Looking forward the sector has reported that order books are more than 70 per cent full for this year, and commitments are already being made for 2022. Over half of the general and trade contractors surveyed expected market tendering conditions to continue to get warmer during the next six months. Colliers predict that average tender price inflation for fit out projects in London to be around six per cent in 2021 and 2022.
Colin added: “With all these pressures on demand and supply both general contractors and trade contractors are becoming more selective over the projects they bid for. This means that occupiers are having to work harder to secure the right supply chain for their office fit out needs. Those with projects with onerous contractual terms or unrealistic programmes will find it much more difficult to secure competitive bids.”