Tentative signs of recovery in UK commercial property market, says the RICS

The 2024 RICS first quarter monitor for the UK commercial property market indicates tentative signs that the market is moving into a recovery phase, though there is still ample evidence that there remains a challenging backdrop. Higher borrowing rates are holding back investments along with other structural headwinds such as a weak economy, online shopping, working from home (WFH) and environmental concerns.

However, RICS reports that respondents to their surveys have formed the view (35 percent) that the market has “reached a floor” for the current cycle, or has at least “entered the early stages of an upturn” (38 percent).

The monitor indicates that a gap appears to be emerging between rising office demand in the capital, against a subdued picture for the rest of the country. (89 percent) of respondents were citing more repurposing of office space for other uses, and (52 percent) of respondents reported increased downsizing involving office tenants, over the previous twelve months.

Secondary offices are showing negative rental projections, with remote working and the non-domestic Minimum Energy Efficiency Standard (MEES) continuing to have an impact on the commercial office sector. Tenants are increasingly going for prime, energy-efficient offices to minimise their running costs, as well as insulating themselves from potential future retrofitting costs. Rents are expected to rise over the next 12 months for both primary and secondary industrial units, but while prime offices are also expected to see a rental increase, the picture is not so rosy for secondary offices and retail units.

While rents are expected to rise over the next 12 months for both primary and secondary industrial sites, and prime offices are also expected to see a rental increase, significantly, secondary offices show negative rental projections.  WFH and Minimum Energy Efficiency Standard (MEES) are continuing to impact this sector of commercial office space. RICS found that tenants increasingly prefer prime, energy-efficient units to minimise immediate costs as well as their potential future retrofitting costs.

RICS reports London remaining ahead of the rest of the country, “with rent expectations at +54 percent, reflecting its significant lead in tenant demand. This represents the strongest reading for Central London prime office rents since Q1 2016,” says the report.

Rising office demand in London contrasts with a subdued picture for the rest of the country with much more repurposing activity taking place there. Office space is being reclaimed for other uses as office tenants’ require less space due to WFH. This shift is very evident over the past 12 months.  In London, office demand showed a significant increase during Q1 2024 while elsewhere in the UK the picture is either flat or slightly negative.  Also, with retail demand, it is showing stronger momentum in London than other parts of the UK.  Meanwhile demand for industrial property remains steady, with most regions reporting positive sentiment.