At the tail end of last year, The Royal Institute of Chartered Surveyors (RICS) published its 2023 UK Commercial Property Monitor, which has served as a leading indicator of conditions in the commercial property occupier and investor markets not just in the UK, but globally.
The much-anticipated latest edition reflected a relatively downbeat status of the commercial property sector, with continued financing restrictions and a low pace of economic activity negatively impacting those previously mentioned markets.
In this blog, we’ll highlight the key takeaways of the report, analyse the expected performance of alternative sectors, and also look at how to drive value with proptech as we move into 2024.
The state of commercial property in the UK
The report highlights the continuing negativity surrounding the commercial property market, with the headline occupier demand indicator posting a net balance reading of -12% for Q3, as opposed to -10% for Q2.
Such negativity was also reflected in the occupier and investment parts of the monitor. While there’s been significant optimism in other parts of the world, the sentiment reading for the UK has risen very slightly from -17 to -16.
Continuing the focus on the UK, there is a collective belief that there will be increasing pressure on corporate cash flows over 2024. However, despite the negative outlook for overall rents and capital values, there is expected to be an upturn in the performance of prime markets.
The lasting impact of the pandemic is still clear, with a significant increase in the availability of office space and inducements being offered to entice more tenants.
The move away from physical office spaces has also been reflected in decreasing interest among investors. This is most obvious in the net balance of investment enquiries being -33% for offices and -35% for retail.
What factors are contributing to the negative trend in tenant demand for office and retail sectors?
Decreased demand across the office and retail sectors has been directly linked to the intensification of financial restrictions and the slow rate of economic recovery following the pandemic.
Aiming to reinvigorate the commercial real estate market, an increasing number of property owners have been offering rent-free periods and other incentives. Indeed, a net balance of +40% of respondents reported an increase in inducements for offices and +34% for retail. This can be compared with a flatter picture in the industrial market.
While commercial property incentives might result in a slight upturn in the short term, any recovery is likely to be slow with 54% of respondents believing that the market is in a downturn phase and 24% sensing that conditions are consistent with the bottom of the cycle.
There are also mixed expectations in terms of projected growth across the sub-sectors of the commercial property market. Despite a drop-off from previous years, 46% of survey respondents expected to see a rise in prime industrial rents over the next 12 months. There’s also expected to be a modest rise in terms of secondary industrial rents.
The picture is far more negative for the secondary office space, with a net balance of -47 in the forecasting of significant rent reductions. There was also a net balance of -57 in terms of the secondary retail outlook. However, there is expected to be some regional variation, with prime office and prime retail rental projections being relatively strong for London.
What do commercial property surveyors say?
The commercial property monitor confirms the uncertainty over commercial property investment, with a relatively low level of office occupancy expected for the foreseeable future. Andrew Nichols of Gadsby Nichols pointed to struggles across the small to mid-sized office market.
Any reversal of the negative trend is unlikely until and potentially beyond the election of 2024. David Morrison Hayton of Eddisons said that he expects an intensification of factors affecting investor and business operator confidence over the coming months. Amidst the increasing political uncertainty, commercial property owners look set for worsening returns over the next couple of years.
Higher interest rates and construction costs will make for a low level of confidence in commercial property development moving forward. This will likely cause sustained investment in low-risk financial instruments, such as government bonds. We may also see increased demand for the transformation of vacant office buildings into domestic properties through 2024 and beyond.
RICS Senior Economist Tarrant Parsons, said: “The UK commercial property market continues to feel the effects of higher interest rates, still well above target inflation, and weak prospects for economic growth over the near term.
As such, investment activity remains subdued, while occupier market trends are also now clearly softening. This general pattern is reported right across the UK, with secondary office and retail premises seeing the brunt of the downturn, driven by both structural and cyclical dynamics.
On a more resilient note, prime offices continue to outperform the secondary market, benefiting from a flight to quality post-pandemic and more attention around energy efficiency standards. Similarly, industrial demand is holding up better than other traditional sectors, even if the picture is far less buoyant than in recent years.”
What alternative sectors are expected to perform well in the coming year despite the challenging economic outlook?
The commercial property monitor indicates positive performance across alternative sectors including data centres, aged care facilities, student housing, and life sciences despite the wider economic challenges.
Respondents suggested positive capital value growth for all of these sectors over the next 12 months, with improvements in every instance compared to the Q2 report. However, capital values in the leisure sector are expected to drop during this period.
How to deliver value with proptech
With the economic picture looking bleak, commercial property managers will be keen to deliver as much value as possible. Thankfully there are a range of software solutions that commercial property professionals can use to optimise the tenant experience and deliver on things well within their control.
For example, in monitoring and making adjustments based on property performance and tenant demand, the streamlining of lease management, maintenance and financial operations can make for improved efficiency and reduced costs across the board.
Property Inspect stands out as the go-to platform for effective property management and compliance. With features for the capture of professional property reports, inspections, and maintenance tracking, our desktop and mobile app allows for significant time savings and more positive tenant experiences.
What can commercial property professionals do with Property Inspect?
- Schedule and manage property visits in real time
- Create actionable checklists for all of your property management needs
- Stay aware of maintenance issues and scheduled work with instant alerts and summaries
- Make time savings with a variety of pre-defined and industry-specific templates
- Streamline and synchronise the property management process with powerful integrations and connectors.
See how Property Inspect can elevate your commercial property workflows by signing up for a demo today.