The Royal Institute of Chartered Surveyors’ (RICS) believes that commercial rental values will fall outright this year, which, according to the latest IPF Consensus, remains very much a minority view.

All of the RICS’ headline balances deteriorated in Q1 2008, with some, including rental expectations, hitting their worst ever levels. The net balance of surveyors reporting a rise in demand across the commercial property occupier market fell from -15% to -30%. That was the second worst reading in the survey’s 10 year history, only surpassed by the -36% seen in Q4 2001. Also, the new enquiries balance dropped from -19% to -35%, suggesting active demand for space will weaken further.

On the back of falling demand, availability of space rose, with the net balance increasing from +7% to +27% in Q1 2008. In addition, the use of inducements rose sharply, with net balances of +27% in the retail sector and +36% in the industrial sector both new record highs.

Against that backdrop, surveyors have become more pessimistic (the aggregate confidence balance fell from -20% to -29%) and have also lowered further their expectations for rental value growth. Surveyors’ expectations now point to all-property rental values falling at an annual rate of 4-5% over the next few quarters.

RICS believes that the occupier market is vulnerable to a marked downturn. But the real economic forces, stemming from the GDP growth slowdown and rising unemployment will, in our view, lead to all-property rents finishing the year down by about 2-3% compared to the end of 2007.