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UK Commercial Real Estate Outlook – Are The Clouds Gathering?

Suzi Carter, a Chartered Surveyor with 25 years’ experience in the commercial and residential property sectors, comments

If you read the newspapers, you would think that we are moving towards an imminent recession. It's always best not to believe what are you reading in the papers, although there are undoubtedly structural factors in the economy that are concerning – high energy prices and rising inflation coupled with increasing interest rates.

However, if Covid taught us anything about the commercial property market, it's that generalisations about what is happening are dangerous. During the pandemic we saw each sector of the market responding very differently to the unique market conditions, and there is no reason to think that the next 12 to 18 months will be any different.

But first it’s important to look at the economic trends to watch in 2022, as these can’t be decoupled from the property market. Labour supply will still be a key focus and with the significant decline in unemployment coupled with the economic bounce back post lockdown there is currently huge inflationary pressure on wages. Inflation is expected to remain elevated, and a continued war between Russia and Ukraine and the commensurate impact on food and energy prices may make this a longer-term trend than may otherwise have occurred.

In order to counter this, the Bank of England are increasing interest rates, although this will probably take place at a slower pace than in ‘normal’ market conditions. In addition, house prices continue to rise, construction costs are increasing, and property owners find themselves with many likely costs due to the obsolescence caused by the new energy efficiency regulations. Many older office, industrial and retail units will be potentially obsolete under these new regulations and tenants will continue to seek higher quality spaces to achieve their corporate social and environmental responsibility targets and to maintain employee retention.

UK commercial real estate has started to recover strongly but there continues to be ‘winners’ and ‘losers’ in the market. All-property rents increased by 3.8% year-on-year to March 2022 (Source: MSCI) – the highest increase since 2016. However, retail rents fell by 1.8%, office rents increased by only 1.1%, and industrial rents increased by a whopping 11% year-on-year. Rental growth will differ between markets and will primarily be a function of the balance between the supply of units versus the market demand in each one.  

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