Quality over quantity becomes the preference for commercial spaces

The Royal Institution of Chartered Surveyors (RICS) UK Commercial Property Monitor Q1 2023 sees the market remaining generally subdued as it continues to contend with higher borrowing costs and a slow economic growth outlook.

However, the overall tone is not as downbeat as last quarter and while a majority of respondents still view the market to be in a downturn a rising share now feel conditions are stabilising (or beginning to improve). The industrial sector in particular has seen renewed momentum.

The headline net balance for tenant demand came in at -3% (net balance) in Q1. Although this is a mostly flat picture, this is a positive improvement on -20% (net balance) in Q4. Within this, the industrial sector saw a pick-up in occupier demand, registering a net balance of +16% vs +6% in Q4.

Meanwhile, tenant demand was flat to marginally negative for office space (net balance -6%) and continued to fall across the retail sector (net balance -23%). Even so, in both instances, this was less negative than in the previous quarter and prime offices are more positive.

Looking at rent the net balance of respondents predicting an increase in prime industrial rents over the next twelve months rose from +40% in Q4 to +58% in Q1, and from +6% to +23% for secondary industrial rents. By way of contrast, the outlook for rents remains negative for prime and secondary retail outlets, although the net balance of respondents expecting falls did moderate. For the office sector, there remains a stark contrast between prime and secondary, with the former expected to see solid rental gains (net balance +29%) while rents are seen falling across the latter (net balance -37%). Anecdotal remarks continue to cite ESG factors as an important driver of demand for some offices.

When looking at broad regions a net balance of +38% of respondents are predicting prime office rents in London rising in the year to come. Although growth in prime office rents is also seen across the South, Midlands and the North, expectations are not quite as elevated as those in London (in net balance terms). Industrial rental growth expectations are particularly buoyant across the Midlands. Both prime and secondary retail rents are projected to fall across most parts of the UK. Interestingly, however, rents are now anticipated to pick-up marginally for prime retail space in London.

Turning to the investment market, investor demand posted a net balance of -14% in Q1. Although still indicative of weakening investor enquiries for a third straight quarter, the latest figure is less downcast than the reading of -30% seen in Q4. Indicators tracking overseas investment demand remained in negative territory across all three traditional market sectors.

Senior Economist for RICS, Tarrant Parsons, commented: “Although the picture across the UK commercial property market remains generally subdued in the face of higher interest rates and a soft economic outlook, the latest survey feedback tentatively suggests that the most difficult period for the market may now have passed.

“Indeed, capital value expectations for industrial assets returned to modestly positive territory having fallen sharply at the end of last year. This improvement has been supported by still solid occupier conditions across the sector, with demand for industrial space continuing to outstrip supply.

“Likewise, many of the more alternative sectors such as aged care facilities, life sciences, data centres and student housing display a resilient outlook for the year ahead. By way of contrast, secondary office and retail properties continue to struggle, evidenced by rental and capital value projections remaining deeply negative across both segments for the coming twelve months”.