Demand for commercial property continues to decline, with the office sector seeing the largest falls, says the latest RICS Commercial Market Survey.

After a positive start to the year, occupier demand fell for the second consecutive quarter in Q3 2010, although the net balance was slightly less negative at -7 compared to -9 in Q2. Demand for office space showed the greatest decline, falling to -14, after growing to +19 at the beginning of 2010. Chartered surveyors report that concerns over the economy have prompted a more cautious attitude from firms when making investment decisions, which is impacting heavily on the market.

Supply to the market continued to increase at roughly the same pace as previous three months. The biggest rises occurred in the Midlands and the North, while available space broadly stabilised in London and the South West. Office space increased at the greatest pace; with 23% more chartered surveyors reporting a rise than a fall in availability. By way of contrast, the amount of retail space fell in the South West and South East for the first time since 2005, perhaps signaling an improvement in the retail market there.

Surveyors’ expectations for increased supply and weaker demand impacted on their outlook for rental growth, with 16% more anticipating rents falling rather than rising over the next three months. Expectations for Central London office rents stabilised after increasing in Q2, while industrial rents in the capital also broadly stabilised. Elsewhere however, rental expectations dropped across the office, retail and industrial sectors.

Development starts for office property in Central London increased for the first time since the crisis, albeit at a relatively slow pace, reflected by new large scale developments such as the 37-storey ‘Walkie Talkie’ skyscraper in the City of London, which shows that some confidence may be returning to this sector of the market. However, the picture is not as positive across the rest of England and Wales where construction starts continue to decline in all other sectors and regions. Development activity in the London retail sector was also particularly weak.

Simon Rubinsohn, RICS chief economist, said: “We are seeing a mixed picture for the commercial property sector across England and Wales. The year started positively, but worries over the impact of spending cuts and the sustainability of the economic recovery appear to be creating an air of caution, which is impacting on the commercial property sector.

“Nevertheless, providing the private sector does begin to fill what is left by a smaller state sector, and the inflation picture does not justify a sharp uplift in interest rates, the likelihood is that the commercial property market will avoid a meaningful relapse into recession.”