The rising cost of construction in the lead-up to the Olympic Games in London in 2012 is undermining City office development, a report will reveal today. The Times

Research from Cushman & Wakefield has shown that building cost estimates have risen by about 25% over the past year.

The surge in costs, coupled with the credit crunch, has turned the City office investment market into a virtual dead zone since the end of July, and there is little prospect of improvement until the new year.

A shortage of skilled labour, soaring prices of raw materials and the burgeoning number of Olympics-related projects have given the building industry the upper hand over developers in the pricing of new schemes in the capital.

A total of £5.4bn was spent on City office space in the third quarter of this year. Although that represented an 8% rise on investment in the previous quarter and 14% more than the same period a year ago, all but about £350m of deals took place before the start of August, the research shows.

Since August, banks have tightened their lending criteria and are demanding far more upfront cash from potential investors – or they are not lending at all.