Commercial property: still reaching for the sky

Could there be a worse time to be a property developer? On the face of it, building new temples of glass in London and elsewhere just as the UK teeters on the edge of recession looks a surefire way to lose a fortune. Yet the commercial property sector is pressing on regardless, with a string of astonishing construction projects around the country beginning to take shape.

The architects' impressions may be a modernist dream – and capture the imagination with nicknames ranging from the cheese grater to the walkie talkie – but these buildings, built at enormous expense, also need to make money. That means finding blue-chip tenants prepared to commit to long-term contracts. In an economic downturn, such clients are in short supply.

However, the developers' hope is that, by the time they've finished transforming the landscape of London and other cities, the landscape of the commercial property sector will look equally different.

Dan Bayley, the head of national lettings and sales at the property consultancy Atisreal, believes such hopes may not be in vain, despite publishing figures earlier this week revealing the dramatic scale of the slump in the commercial sector.

On Monday, Atisreal said lettings in central London during the second quarter of the year were down 49 per cent on the same period a year ago. As a result, almost 5 million square feet of space stands empty in the City of London alone and rents have fallen back sharply.

Nevertheless, Mr Bayley said speculative construction could still pay off for developers. "It is a leap of faith, particularly if you are funding these projects through debt," he warned. "But commercial property has a long-term cycle and while there is a lot of supply coming through this year and quite a bit next, there is very little projected for 2010."

Assuming the economy rights itself in 2009 and 2010, the overhang of space in the property sector might well have been unravelled by 2011, just as the largest developments come up for rent.

This is the view taken by developers such as Gerald Ronson's Heron International, which insists its Heron Tower on London's Bishopsgate will be built by 2011, with construction contracts and finance already in place. "[We are] totally on track", a spokesman says.

Ed Thackery of Land Securities, in the process of demolishing properties at 20 Fenchurch Street, says the company won't take a final decision on a planned £200m development until next year.

"It takes three years to build an office development so inevitably, when you're planning this sort of building, you have to take a view on what the market will look like when you complete," he said. "Often it's the case that you start the process when the market is quite bleak on the basis that the outlook is much brighter."

Developers also have to take a view on the extent to which they build speculatively. A spokesman for Canary Wharf Group said: "We just don't do speculative builds full-stop – our existing projects will be built up to ground level and if we have a tenant we will continue building; if not, we won't." Other developers are less conservative, happy to build on the basis of some pre-letting, or even none at all.

Even in a slowdown, securing tenants is not impossible. The average large company moves office every 15 years or so, typically planning the shift around two to three years in advance. In theory, this means there is always some demand for new office space and the planning cycle suits developers' timeframes.

Nevertheless, any speculative property development exposes its backers to huge risk because halting a project if the outlook improves less rapidly than hoped means money has been spent with the prospects of recouping it receding rapidly.

One option for developers is to spend a limited amount of budget on securing planning permissions and clearing the site, but to stop short of construction contracts. "The moment you start construction, it becomes expensive to stop or slow down, because you're paying builders," Mr Thackery said. Backing out of contracts altogether is likely to incur steep penalties.

Dan Bayley thinks most of the large projects already unveiled by property developers will get built, but that many may suffer delays. "These are mostly speculative requiring multi-lets, which makes them hostages to fortune," he warns. "There's a good chance projects slated for 2011, say, won't complete until 2012 or 2013, say, and that will carry a cost."

Piccadilly Tower, Manchester

This development was acquired two years ago by the Irish developer Ballymore. A mix of residential and commercial units, the tower will be Manchester's tallest building, at 188m, on completion in 2010. Costing £220m, groundwork began on the site in January.

Walkie Talkie, Fenchurch Street, London

Demolition of the building currently standing on this site has begun and will be completed towards the end of the year. Developer Land Securities expects to decide whether to begin constructing a 160m tower next year, with the whole project expected to cost upwards of £200m.

Riverside South, Canary Wharf

Another Canary Wharf Group project, the developer is also taking a cautious approach to the Riverside South build. Work on foundations and basic infrastructure have begun but the project will be mothballed at ground level unless tenants have been found for the 236m tower by this stage.

Heron Quays West, Canary Wharf

Planning permission has recently been secured for this site just south of the main Canary Wharf complex, but Canary Wharf Group is not yet committed to its construction. The tower, designed to top out at 204m, will only be built in the event that the developer secures tenants.

Shard of Glass, London Bridge

Stellar Property is working with a consortium of Qatari investors to build this 310m tower, which would be the tallest in the UK (and in the EU until the Tour Generali in Paris is finished). It will include a hotel and offices for Transport for London and is expected to be completed in 2012.

Helter Skelter, Bishopsgate, London

Acquired by Arab Investments in February 2007, this building, now officially known as The Pinnacle but previously called Bishopsgate Tower, is due to be finished in 2012. Construction is expected to begin shortly, and at 288m, it will be the highest building in the Square Mile.

Heron Tower, Bishopsgate, London

Gerald Ronson's Heron International is at a more advanced stage of building its tower in the City than most of its rivals. At 246m, the tower, on which construction has already begun, will offer 63,000m2 of space and cost £185m. Finance and construction deals have been signed.

V Building, Birmingham

The V Building was proposed in 1998 but has been hit by delays. Developer Dandara had hoped to complete in 2009, but work has yet to begin and latest estimates are for a 2013 opening. The mixed-use building has been redesigned several times, but is expected to reach 150m and cost £150m.