Construction of new offices will plunge by 10 per cent this year and 20 per cent in 2019, according to the latest forecasts from the Construction Products Association.
Concerns over long-term economic prospects and returns on investment have hampered the market for major office developments since the EU referendum, the association’s autumn forecast states.
New orders for offices, which account for roughly one third of the commercial market, have halved from £1.6bn in the first quarter of 2016 before the EU referendum to £800m in the second quarter of this year.
The office sub-sector is expected to be the worst-performing over the next couple of years, with minimal growth expected for the construction industry overall.
Having jumped 7.1 per cent in 2017, output is forecast to increase just 0.1 per cent for the whole of 2018, rising marginally to 0.6 per cent for 2019.
CPA economics director Noble Francis said: “Overall, we are still expecting construction output to increase next year but this growth is highly dependent on housebuilding outside London and also major infrastructure projects offsetting falls in activity in other sectors.”
The commercial sector, which is the second-largest market after housing, is forecast to suffer the most, with output dropping 5.4 per cent and 7.1 per cent in 2018 and 2019 respectively.
Alongside double-digit falls in office construction, output for the retail sector is also expected to decline.
The shift to online shopping and higher business rates have reduced demand, with output forecast to drop 10 per cent in 2018 and then a further 2 per cent in 2019.
Infrastructure output forecasts have been downgraded from 3.2 per cent to 0.8 per cent for 2018 and from 13 per cent to 8.7 per cent for 2019.
Growth is expected to be propped up by the start of new regulated spending periods for the rail and water and sewerage sectors, along with further work on projects such as HS2, Hinkley Point C and Tideway.
The sector’s downgrade follows the nine-month delay and £600m cost overrun on Crossrail that the CPA said had raised concerns on progress for other major projects.
Housebuilding is forecast to continue growing outside of the London market, with Help to Buy sustaining demand.
The CPA’s forecasts are based on the assumption that the EU and UK will reach a deal on Brexit towards the end of the year.
Prof Francis said the sooner a deal was struck, the better the outlook for the construction industry.
“Looking on the positive side, if the government is able to reduce the uncertainty sooner rather than later and improve delivery of major projects, to time and budget, then the risks to the forecasts are on the positive,” he said.
PMI data for September showed confidence in the industry was at its lowest level since 2013.