The current state of the commercial property sector

commercial property siteWith economic uncertainty prevailing both globally and in the UK it would be no surprise if the commercial property sector was facing some difficulties.

The commercial property sector covers Community, Education, Hotel, Healthcare, Office, Retail and Industrial and it is clear from some of the statistics that the woes of retail have been acting as a drag on the sector as a whole.

Jones Lang LaSalle (JLL) provides information on property and investment opportunities and in its most recent analysis on new construction starts it revealed that they fell in the first quarter of 2019 for the first time since Q2 2017.

It reports that the ongoing uncertainty “dampened UK commercial real estate transactional activity in Q2, with investment volumes slowing to £8.9bn. This represented a 22% decline on the first half of and was the slowest first half of the year since 2013.

However, it reports, Alistair Meadows, Head of UK Capital Markets, believes that “Market fundamentals remain strong, with high levels of leasing, low vacancy rates and rental growth offering encouragement to investors. “

The Royal Institution of Chartered Surveyors (RICS) reports that in London demand for commercial property in London stayed in negative territory for the 12th quarter in a row and Capital Economics expects a weakness in investment activity is likely to extend into the rest of the year.

Aside from the obvious continuing uncertainty about the UK’s economic future outside the EU, the retail woes are likely to be a significant drag on commercial property. It is estimated that some 20% of retail landlords’ tenants are in significant financial difficulty, Many are insolvent and have embarked on restructuring via CVAs where insolvency is a prerequisite for doing a CVA. Furthermore there are indications that a lot of town centre retail space is no longer viable with landlords seeking planning permission for a change of use so property can be converted into residential units.

Finally, according to CBRE, the world’s largest commercial property services and investment company, most commercial property rents have been reducing in the first half of the year, declining by -0.2%, although it said the industrial sector was the best performing prime market, recording a capital value growth of 1.6% Quarter-on-Quarter, and a Year-on-Year of +6.8%.

One trend that may be significant in the future is the growing popularity of flexible tenancies and shorter leases rather than businesses owning and occupying large corporate buildings. This is already popular for renting for office space with Regus and WeWork growing rapidly but is likely to be used as a more flexible approach to renting light industrial and retail space.

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