Slowdown in office construction will hit fit-out sector in 2009

18 April 2008

The latest AMA Research report, 'Commercial Interior Refurbishment and Fit Out Market 2008-2012' suggests that trading conditions in 2008 will be reasonably buoyant, although demand from 2009 could slow down considerably as office supply and demand begin to equal out.

However, the growing impact of the ‘credit crisis’ is already beginning to affect the office construction sector and recent growth rates are unlikely to be sustained This will inevitably have an impact upon the fit-out market, particularly in the financial sector, as institutions cut back on their expansion or relocation plans in a period of uncertainty.

For the first time the public sector has been included particularly schools and healthcare. This is primarily
because over the next 15 years, the most stable area of demand for fit-out/interior refurbishment services will be the schools market, underpinned by the Building Schools for the Future programme.

The fit-out & refurbishment industry is estimated to be worth £7.8bn at main contractors prices in 2007, which represents strong growth over 2006 activity levels. Since the recovery of the office market in 2005, following the onset of recession in the financial services and TMT (telecoms, media & technology) sectors in 2002, contractors output in the fit-out & interior refurbishment sector has shown a steady underlying increase.

This has primarily been underpinned by the subsequent recovery in speculative and pre-let office construction in Central London, an unprecedented level of activity in the development of tall buildings in the UK’s major cities, and increased levels of investment in public sector works, in particular schools newbuild and refurbishment.

The office sector is by far the most important area of demand for fit-out and interior refurbishment, estimated to account for 30-40% of main contractors output, followed by the retail industry. Overall levels of demand from the retail sector have been impacted upon by relatively poor trading conditions during late 2007 and early 2008, with only the grocery multiples sector managing to buck the generally flat market conditions.

Over the short term, full order books among main contractors operating in the office sector suggest that trading conditions in 2008 will be reasonably buoyant, although demand from 2009 is likely to slow down considerably. Without doubt, the recent level of credit-fuelled consumer spending has ended and is unlikely to recover in the short term. This will inevitably have an impact upon trading in the retail and leisure industries, and in turn lead to lower levels of construction activity - the main exception being the grocery multiples. However, over the medium term, the Olympic Games programme should generate demand for interior refurbishment as both hotel operators and owners of other leisure/entertainment establishments – particularly across SouthEast England – will need to invest in upgrading premises ahead of 2012.

Early 2008 is seeing the first indications of a slowdown in the office construction sector, which may not impact heavily on the fit-out market in 2008, but will feed into medium term market prospects if the current credit crisis is sustained. As a result, our forecasts for 2009-10 indicate a substantial slowing in the rate of growth, but this could turn into a potentially severe downturn if confidence in speculative office construction is undermined and projects are cancelled.

AMA Research’s report “Commercial Interior Refurbishment and Fit-Out Market UK 2008-
2012” is available in hard copy or electronic format for £625 and can be ordered online at
www.amaresearch.co.uk or by calling 0871 3103450.