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Commercial property space is recovering slowly amid changing requirements

Office units

Commercial property space is recovering slowly amid changing requirements

Propertymark reports on the state of the commercial property market while others cite the changing nature of commercial leasing arrangements.

Propertymark - the property agent’s professional body with 17,800 members, estate and letting agents, commercial agents, auctioneers, valuers and inventory providers - in its latest Q1 2024 Commercial Property Outlook report, paints a somewhat mixed and unexciting picture of the sector’s immediate future.

NAEA Propertymark’s commercial property agent members were asked to give their views on supply and demand levels within the sector over the next 12 months. On the positive side, around 50 per cent of the respondents saw a boost in supply coming along, and roughly one-third (31 per cent) were forecasting a corresponding boost in demand.

Commercial property - sector analysis  

In the office sector, around 40 per cent expect there to be an increase in supply, whilst rather dispiritingly, 80 per cent suggested that demand would shrink or stay about the same. 

In the food takeaway sector, 27 per cent of members surveyed expect an increase in both demand and supply. In the industrial sector 50 per cent of members were forecasting a welcome surge in demand, while 25 per cent anticipate an increase in supply.  

Capital values are thought to have shown an improvement: in the land and yards and industrial sectors the agents were quite positive, though in the pubs and restaurants sector, the outlook is bleak: sentiment has declined further since the previous quarter.  

As for rent levels, the positive sentiment in the industrial and land and yards sectors contrasts with the situation in the office and takeaway sectors. These latter remain negative about rent levels.  

58 per cent of members reported rents increasing following rent reviews carried out in Q1 2024 and only 16 per cent saw them decreasing as a result of their rent reviews.  

Nathan Emerson, CEO at Propertymark, said:  

“Member sentiment varies by sector, but there is notable positivity in the Land and Yards and Industrial sectors. 

“Supply and demand imbalances remain, most notably in the pubs and restaurants sector, which continues to be impacted by changing trends. However, as the economy stabilises, we remain optimistic about the outlook for the UK commercial property sector.”  

Michael Sears, Commercial Advisory Panel Member, comments:  

“Appetite for town centre retail is still predominantly from local business, but there have been some encouraging signs that brands have started to step up activity. Demand for larger open plan offices remains poor but there has been a resurgence in demand for smaller offices in business centres. 

“With the government’s proposals for high street rental auctions due to hit the market from September, the devil will be in the detail of how the mechanics of this might work. We need to avoid the unintended consequence of pushing price, rents and thus investment and regeneration of town centres down.” 

Colliers anticipate 2024 will mark a turning point for commercial property

Interest rate cuts, expected later, should improve property yields across the board, says Colliers. 

“As inflation falls and interest rates decrease, investor confidence and improved debt financing will boost investment activity. We predict all property total returns growth of just over 10% this year led by industrial and retail warehouses. Highlights in the latest REIF include: Total returns growth to peak in 2025.”

Colliers in their UK Real Estate Investment Forecasts report quarter 2, 2024 notes that “large yield shifts have resulted in a collapse in capital values since the middle of 2022 with offices and industrial recording the strongest declines (-27 and -26%, respectively).”

The retail sector, says Colliers, was already undergoing structural change, so the drop in capital values was more moderate at -19 per cent. However, more recent quarterly rates of change show a significant moderation in the drop in capital values, with all property recording a decline of just 0.6% q/q in Q1 2024, down from -2.2% q/q in Q4 2023. 

“We believe that 2024 will be the turning point for commercial property, with interest rate cuts boding well for property yields across the board. Investment activity will improve in 2024 as investor confidence resumes on the back of falling inflation, lower interest rates, and improved debt financing opportunities. However, it will take some time for investment activity to resume to levels seen before the market downturn began and we may struggle to reach annual volumes of £50bn”

Colliers Total Returns forecasts:

Changing requirements

Meanwhile, MetSpace, a destination company for premium managed offices in Central London, reports that three-quarters of UK businesses are on the hunt for a new workspace. A survey revealed that 59% of commercial tenants agreed that flexible workspaces are the ideal fit for their business needs – that’s according to research from digital infrastructure specialists NCG-Global.

NCG and MetSpace say that the capital's landlords need to adapt to meet demands of a changing property market. A sub-market is emerging, they say, where specialist groups and flexible agents are breaking away from the traditional mould, with some interesting trends emerging.

MetSpace’s director Robert Schogger says he has firm views on what landlords can do to tackle the flexible market - based on over 30 years' experience operating flexible space in London. He uses his knowledge and insight about what occupiers want and what landlords need to get right, with his team, to advise landlords.

With three-quarters of UK businesses tenants actively considering changing their workspace, they are looking out for new workspace. That’s according to the results of the new research from the digital infrastructure specialist, NCG.

The independent survey of 1,002 senior decision-makers within UK businesses NCG found that 70 per cent of businesses currently use an office or workspace on a hybrid (46 per cent) or full-time (24 per cent) basis.

According to a recent article published by the Facilities Management Journal, serviced offices (37 per cent) are now the most common type of space businesses use. This is followed by “office and meeting space hired by the hour or day (36 per cent), private offices (35 per cent) and flexible or coworking space (32 per cent), with many businesses using more than one type of space to meet their needs.”

The FMJ says:

“Of all the businesses that currently use any form of workspace, 76 per cent said they are either actively searching for a new space or plan to start looking in the next 12 months. Most (59 per cent) said they are regularly assessing the choice of different workspaces to see which best fits their needs.”

“Speaking specifically to those who currently use a flexible or coworking space, nearly half (45 per cent) agreed that they were unlikely to ever rent their own private office again, with 59 per cent agreeing that flexible workspaces are the ideal fit for their business’ needs.”

Following its survey, Thomas Proctor, CEO of NCG, had said: 

“The times have changed. Today businesses have so much choice of where their employees can work. Clearly, leased and serviced offices remain popular, but flexible and coworking spaces are on the rise, while pay-as-you-go spaces are also becoming an attractive option for businesses that are largely remote but meet in person on occasion. 

“There are significant knock-on effects for the entire office and commercial real estate sectors. Ultimately, choice is power, and our research highlights that businesses are constantly evaluating their options. This means that delivering great spaces and great experiences is imperative – otherwise, as our data proves, businesses will simply vote with their feet. 

“It’s critical that landlords and workspace operators remain agile if they want to successfully meet the changing demands of modern working – namely, spaces that are dynamic, attractive and tech-enabled. Doing so can simultaneously improve tenant retention and future proof their assets.”


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