I had a wry smile recently when I was looking back through commercial property journals from the beginning of 2022, which were predicting low interest rates for the next few years as part of the U.K.’s ‘bounce back boom’. How things have changed in a few short months! We now face a looming cost of living crisis this winter with rising energy costs, high inflation and increasing interest rates. But what tends to happen to commercial property in markets such as this?

Ordinarily, rents tend to rise with inflation in order to keep up with the cost of living and this can obviously be a huge benefit for commercial investors as capital values should also increase, meaning enhanced commercial returns, especially if you fixed your bank debt prior to interest rate rises.

Investors’ cash starts to erode in the banks and cash purchasers tend to pile into the market to hedge against inflation – this can also fuel capital value growth. At times like this, commercial property tends to be perceived as a safe haven in which to invest, as long as you choose the right product with long term growth potential.

However, these general trends may be tempered in 2022/23 by a looming recession. If this occurs, consumers will tend to restrict their ‘discretionary spend’ meaning that tenants that operate businesses that fall in this category may start to see a reduction in sales and struggle to pay rents. Regrettably, I would expect to see some tenant failures should the cost-of-living crisis continue for too long. Clothing retailers are an example of ‘discretionary spend’ operators. When faced with a restricted ability to spend, often a consumer will choose to pay their bills, buy food or choose an ‘experience’ (such as a meal out) rather than buying new clothes, and it is often fashion retailers that are affected by this first. Already, agents are reporting an unwillingness by some tenants to commit to long-term leases, operating a ‘wait and see’ policy to see if the market is going to drop.

For those investors that need to use debt, however, the rising cost (and reduced availability) of finance will inevitably start to soften the investment market, despite cash investors’ desire to pile in.

However, I firmly believe that there will be opportunities in the coming months as some of the ‘punchier’ pricing that we’ve seen in the recent market starts to dampen as sentiment reduces. As Baron Rothschild famously said, ‘Buy when there’s blood in the streets, even if the blood is your own.’