Global office development faces viability crisis - Savills

Savills reports that despite a 13% average increase in prime global office rents since 2020, the development pipeline for new office spaces is shrinking significantly, particularly in the US and Europe. 

Office delivery pipeline - Savills

By the end of 2027, the US is projected to see only 827,000 m2 of new office deliveries, while Europe will have a mere 2.25 million m2.

In its "Impacts" thought leadership program, Savills identifies several factors hindering new projects: escalating costs for construction and labour, high borrowing rates, and increased regulatory burdens. These challenges, combined with broader economic and geopolitical instability, are eroding both consumer and investor confidence.

To assess development viability, Savills analysed three global cities. Their calculations indicate that to be profitable in the current environment, the gross development value (GDV) for an average office project needs to be approximately $33,368 per m2 (€30,733 per m2) in New York, $17,760 per m2 (€16,368 per m2) in London, and $14,746 per m2 (€13,594 per m2) in Seoul. These figures are derived by comparing total project costs—including land, construction, professional fees, financing, and profit margins—against potential project income.

Simon Collett, executive director and head of Savills Building and Project Consultancy EMEA, commented: “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. 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, added: “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.”