Commercial Property Market Forecast Shows Signs Of Recovery
The comprehensive quarterly forecast of the Commercial Property Market from Robert Irving Burns (RIB), the real estate investment professionals, has found:
- Industrial sector leading the Commercial Property recovery, with rents (+0.1%), supply (+2.6%) and demand (+0.1%) forecast to rise in Q2 2023.
- Overall Commercial Property Sales Price Per Sq. Ft are forecast to drop by 1.6% in Q2 2023, primarily down to the Office sector expected to see the largest fall in sales prices per sq. ft, down 2.7%.
- On aggregate, Commercial Rents Per Sq. Ft are beginning to recover, forecast to drop just 0.4%, with all four sectors showing improved forecasts from the previous quarter.
In a survey of over 8,000 UK commercial estate agents, the Robert Irving Burns Commercial Property Report has forecast that Commercial Property Sales Price Per Sq. Ft are set to fall by 1.6% and Rents Per Sq. Ft falling 0.4% on aggregate as the market shows signs of a spring recovery
Antony Antoniou, CEO of Robert Irving Burns (RIB) the real estate agency and investment specialists, comments: “While it is far from plain sailing ahead, the outlook is decidedly more positive that the previous quarter forecast. There is consensus among economists that inflation will halve to around 5% by the end of 2023, which will help to ease both the cost of living crisis and business appetite for certain capital investments. To achieve that, it’s likely that the Bank of England will not only raise base rates (up to 4.5% according to one-yr swap expectations) but keep rates higher for longer, which will create a cap to any potential growth and easing of capital expenditure.
“As a result, our forecast has seen rent expectations in Industrial move into the black (up 0.1%) and rents overall across commercial expected to be down just 0.4%. Sales values will take longer to recover and are expected to reduce further by 1.6% in Q2, with Offices seeing the sharpest fall, down 2.7%.
“With the supply of property coming onto the market expected to remain high, up 2.6% in Q2, rents are recovering and sales values remain low, it continues to be a buyers’ market for those with access to capital. This is particularly pertinent across the Retail and Leisure sectors, where high yields means they are less affected by spiking interest rates in relative terms.” Source: Sourced from Valuation Office Agency and HM Land Registry data © Crown copyright and database right 2021 and RIB private databases. NB: The above data from Q1 2023 is forecast; at the time of writing no actual data was available & Leisure industry is omitted from this graph due to a lack of comparable back data.
Office
Sales: The office market is forecast to see the greatest fall in sales values over the next quarter, with prices per square foot predicted to fall by 2.7% (marginally less than the -3.0% predicted in Q1 2023).
This is the sharpest fall across all four sectors analysed, with the next closest 1% improved (Leisure -1.7% sales value growth). Close to a quarter of respondents (24%) believe that office sales prices could come down by over 5% over the period.
Rents: Rents, on the other hand, are expected to see some growth, and while they are forecast to drop by 0.4%, this is a 1% recovery on the previous quarter (-1.4% in Q1 2023). The reasons behind this, according to the respondents, is strong demand for high quality (CAT A), flexible and collaborative spaces, which are more limited in supply and could push rents up.
Retail
Sales: The retail sector continues to be challenging, with sales prices per square foot expected to drop by an average of 1.3%, however this is an improvement on the previous quarterly forecast ( -2.9%). There does appear to be some divide in terms of market expectations between the larger retailers and SMEs, with demand supporting price growth across centrally located, boutique properties, and large out-of-town properties underperforming.
Rents: Rents are forecast to drop by -0.7%, which is an improvement on the forecast 2.1% rental decrease in Q1 2023. It is the sharpest decline among all the sectors, however, there remains potential rental growth in high street retail in line with inflation over the year.
Demand vs. Supply: Demand in Q2 2023 is forecast to reduce by 0.7%, which again is up on the Q1 forecast of -2.03%. While there are still challenges post-pandemic, it is encouraging that high street premises remain in demand, according to respondents. Given the number of store closures and out-of-town downsizing, it is unsurprising that supply forecast to rise by 2.7%, up from the Q1 forecast (2.1%).
Lease length: The average lease length within retail is rising. The majority of respondents (43%) now believe the average lease length in Q2 will be over 55 months, this is up from between 23-40 months (40% forecast this was the average lease length in Q1).
Business Rates: When asked about the upcoming changes in Business Rates, our respondents felt that they will have a positive impact on Independent SME retailers (44%) and the High Street (47%). A third of respondents (33%) expect rates rises to have a negative impact on nationwide retailers, and 46% anticipate out of town retail to be negatively impacted. Given the forecasts, it begs the question, will Q2 2023 begin the boom of the boutique retailer?
Industrial
Sales: The industrial sales price per square foot is forecast to drop by just 0.8% in Q2, making it the best performing sector in terms of sales price and significantly improved from the previous forecast (a predicted drop of 2.7% in Q1). Indeed the respondents were divided, with 36% of respondents forecasting that prices would rise and 20% believing prices could rise by over 2% with the main variations being due to location and size of property.
Rents: Rents in this sector are forecast to increase by 0.1% on average, an improvement on the -0.6% forecast from last quarter. It is the first rental value among the four sectors forecast to move into the black this year, which will further impact yields within the sector.
Supply vs Demand: The forecast supply of stock for the Industrial sector in Q2 is set to increase, rising to 2.6% (Q1 was expected to drop 0.95%). This is also the only sector forecast to see a rise in demand as well (up 0.1%) which had been forecast to drop 0.8% in the previous quarter.
Lease length: The majority (47%) of respondents believe the average lease length will be over 55 months, but that majority is reduced on the previous quarterly forecast (58%) and there is a rise in the number of respondents (42%) seeing lease lengths below 35 months.
Leisure
Following feedback from respondents, we have included Leisure in this latest forecast, with just under a quarter of respondents (24%) operating in this sector.
Sales: Sales price per square foot is forecast to drop by 1.7% in Q2, which is higher than Retail (-1.3%) but not as significant a drop as the Office sector (estimated drop 2.7%). While the sector had rebounded in early 2022, the outlook for the first half of 2023 remains challenging, with rising interest rates impacting debt costs and therefore the expectation of lower investment.
Rents: Rents in this sector are forecast to decrease by 0.7% on average, which is in line with the Retail forecast (-0.7%). Tenants have been through a challenging period, due to the well-publicised cost of living crisis reducing consumer spending and staffing challenging as a result of the Pandemic and Brexit implications.
Supply vs Demand: In Q2 our respondents are expecting supply to increase at the highest rate of all the sectors, rising 2.8% in the quarter. While overall demand is not expected to rise (it is forecast to fall 0.4%), respondents are expecting to see continued high demand for premium quality, and real estate that does not meet investor and occupiers' specification or environmental goals will be marginalised.
Lease length: The majority (48%) of respondents believe the average lease length will be over 55 months, which is similar to both Retail and Industrial.
Business Rates: When asked about the upcoming changes in Business Rates, the majority of our respondents (52%) felt that the Hospitality and Leisure sectors would be negatively impacted, which might well be reflected in the expected negative values across both sales, rents and demand.
