Commercial Property Market Review – August 2023

commercial offices

Higher interest rates dampen investment

The results of the Q2 2023 RICS UK Commercial Property Monitor point to a renewed setback for the commercial property market, with an upward shift in interest rate expectations weighing on investor demand and placing downward pressure on capital values.

The survey shows a clear majority of respondents (68%) are now of the opinion that the commercial market overall is in a downturn phase of the property cycle, with the deteriorating credit environment playing a significant role in this downturn. However, there are pockets of resilience across occupier markets – the industrial sector in particular (alongside some alternative asset classes) continues to show positive rental growth projections for the year ahead.

Away from mainstream sectors, nationwide rental growth expectations remain comfortably in positive territory across multifamily residential, aged care facilities, life sciences, student housing and data centres.

In Scotland, both office rents and industrial rents are expected to rise, with a net balance of 21% and 32% of respondents expecting an increase respectively. In retail, a net balance of -4% of respondents expects rents to decline – up from -51% in Q1.

Alternative future for London offices

With London office landlords seeing lettings tumble in recent times and the clamour for warehouses in the capital that took place during the pandemic calming, the less traditional sector of life sciences looks to be increasing its presence in London. 

There has been a recent flurry of investors looking to create specialist sites in London for the UK life sciences industry and there are more opportunities to do so as traditional offices are less in demand.

Property giant British Land is looking to boost its presence in this sector, with a major overhaul of the 1970s Euston Tower. The plan is to adapt the office space into net zero workspace featuring labs for start-ups and scale-ups.

Another example is Canary Wharf Group, which together with developer Kadans Science Partner, has planning permission for a 823,000 sq. ft tower providing workspace for the likes of genomics, medical tech and biotechnology.

Sustainable buildings lead the way

Recent research, polling 250 UK office landlords, reveals the current state of play as well as outlining the challenges and motivating factors facing the commercial property market as it moves toward net zero targets.

An encouraging 72% of landlords currently have individual sustainability policies in place. However, the minority (30%) lack an overall strategy and say they are struggling to get to grips with sustainability. Notably, 49% of landlords say it is difficult to keep up with regulations on energy efficiency and that the cost of improvements is too high. Even more (53%) say that they are unsure how to effectively go about this.

Many landlords are turning to experts – the survey reports that 92% of landlords are already, or are planning to outsource the implementation and development of sustainability policies to a third party.

Commercial property currently for sale in the UK

      • London has the highest number of commercial properties for sale
      • There are currently 1,854 commercial properties for sale in London, the average asking price is £1,253,157
      • Scotland currently has 1,174 commercial properties for sale with an average asking price of £342,204.
Region No. properties Avg. asking price (£)
London 1,854 1,253,157
South East England 1,588 704,310
East Midlands 850 794,257
East of England 961 585,373
North East England 840 323,017
North West England 1,503 425,079
South West England 1,796 579,741
West Midlands 1,169 616,035
Yorkshire and The Humber 1,260 330,041
Isle of Man 50 442,887
Scotland 1,174 342,204
Wales 902 448,390
Northern Ireland 3 19,642

Source: Zoopla, data extracted 19 July 2023

Commercial property outlook

Occupier demand – broken down by sector

Occupier demand

    • A headline net balance of -10% of contributors was reported for overall tenant demand over Q2
    • Tenant demand fell across both the office and retail sectors, evidenced by negative net balance readings of -21% and -26% respectively
    • A net balance of +10% of respondents noted an increase in demand for industrial space.

Availability – broken down by sector

Availability

    • Availability was more or less unchanged across the industrial sector in Q2
    • Availability of leasable office and retail space has continued to increase in each quarter since the pandemic
    • Incentive packages on offer to tenants continued to increase within the office and retail sector.

Source: RICS, UK Commercial Property Market Survey, Q2 2023

Written and supplied by The Outsourced Marketing Department.  All details are correct at the time of writing (21 August 2023)