Commercial Property Market Outlook Post-Election
The UK commercial property sector is experiencing a transitional period as it awaits potential changes from the new government’s upcoming budget. According to the latest Q3 2024 RICS UK Commercial Property Monitor, while the market remains cautious, some positive indicators are emerging. With small gains in occupier demand and notable interest in prime sustainable office spaces, the market is moving toward a gradual recovery. Here’s an in-depth look at the current trends and what they might mean for investors, landlords, and occupiers.
Market Sentiment: Wait and See for the Budget
A key takeaway from the latest RICS survey is the market’s hesitation ahead of the budget announcement. This “wait and see” stance is affecting decision-making across regions, as respondents report a slight uptick in occupier demand, but many remain cautious. Specifically, 44% of survey participants believe the market is in the early stages of an upturn, but only a modest shift is apparent.
Despite these reservations, prime rental projections are still positive, particularly for prime office and industrial spaces. As the commercial property industry adapts to new economic conditions, investors and landlords can expect modest capital value and rental growth in the coming year.
Sector-Specific Trends: Industrial Leads, Retail Faces Challenges
The industrial sector continues to outshine other sectors, with a net balance of +14% in occupier demand. However, this demand, while positive, lags behind its historical average of +28% over the past decade. For office spaces, demand remains relatively flat, yet prime sustainable office spaces are still appealing to occupiers due to higher energy efficiency and environmental considerations. Meanwhile, retail is seeing a shift, with sentiment at its least negative level since 2022 and landlords offering enhanced incentives to attract occupiers.
As vacant office and retail spaces increase, landlords are providing more attractive incentive packages. For businesses seeking new locations, this presents a unique opportunity to negotiate favourable terms.
Investment and Distressed Sales: A Mixed Picture
Investment activity remains level across sectors, with positive sentiment mostly confined to the industrial sector. One area of concern is the rise in distressed sales due to elevated interest rates, which has led to mortgage challenges for some landlords. RICS reports a net balance of +29% of respondents observing an increase in distressed sales over the last year, with further increases expected (RICS, 2024). Retail, office, and leisure properties are identified as the most vulnerable to forced sales in the coming months.
For prospective investors, this trend may present an opportunity to acquire properties at competitive rates. However, investors must carefully evaluate the long-term prospects and potential costs of any distressed assets.
Rental Projections and Sustainability in Commercial Property
In a positive sign, rental projections for prime spaces in all sectors are expected to rise over the next 12 months. Prime sustainable office spaces, in particular, are drawing attention from occupiers, underscoring a growing preference for properties that meet environmental standards. This trend aligns with a broader shift toward sustainable development in commercial property, where energy-efficient and environmentally friendly buildings are more likely to secure higher rents and longer leases.
Landlords with properties that do not meet these sustainability criteria may need to consider upgrades or risk lower occupancy rates and rental values in the evolving market.
Conclusion: Optimism Amidst Uncertainty
While the UK commercial property market faces uncertainties, particularly with the upcoming budget, there are reasons for cautious optimism. The gradual increase in demand and the shift toward sustainability in office spaces signal a market beginning to stabilise. For investors and occupiers, the next year presents both challenges and opportunities, as the market adjusts to new government policies, interest rate changes, and evolving tenant expectations.
Fisher Wrathall Commercial remains committed to helping clients navigate these changes with expert guidance and insights. Contact us today to discuss how we can assist with your commercial property needs.
For further information, see the RICS UK Commercial Property Monitor Q3 2024 for additional insights into the commercial property landscape.
