Commercial market; a tale of three sectors

While the outlook for new work in the industrial/warehouse sector remains bright, the office market appears to have stabilised but clouds are continuing to gather over the retail property sector.

The contrasting fortunes of the different sectors were underlined in the latest RICS UK commercial market survey. It showed that tenant demand rose strongly for industrial space (reported by a net balance of +28% of surveyors) and stabilised in the office sector after a fall in the second quarter. But demand for retail space fell for the second quarter running as reported by net balance of -16% of surveyors(against -15% previously).

However, the overall message from the survey was mildly positive for the industry with a slight improvement in both investor and occupier demand in the third quarter. Most encouraging for the construction industry, was a marked increase in investment inquiries, reported by a net balance of +20% of surveyors. No doubt encouraged by the weak pound, interest from overseas buyers increased across all market areas.

The survey showed that the industrial sector attracted the most interest from would-be investors. Expectations on rent and capital values are strongest for industrial space and the availability of leasehold space fell markedly in the sector. Much of the activity in the sector is being driven by the need for new warehousing/logistics capacity for online retailers.

The latest Glenigan data reflects the buoyancy of the sector. It shows that the value of underlying industrial project starts rose by 15% to £2,634 million in the nine months to September 2017, compared to the period last year. Industrial starts so far this year have been particularly strong in the South East (+88%), East Midlands (+38%), North East (+56%), Scotland (56%) and Wales (53%).

The outlook for the office market is more mixed. Tenant demand has stabilised and rent expectations for prime office space – where most new construction is focused - have picked up although they are flat for secondary space. But landlord incentives to attract tenants have increased for the fifth quarter running. The cooling in the sector is reflected in Glenigan figures showing a 7% fall in the value of new office starts in the nine months to September, compared to the period last year.

The outlook for retail property is also less encouraging. The RICS survey shows that inducements for tenants to take up retail space have picked up for the second quarter running and rents for secondary retail are expected to fall over the coming 12 months. Again, the cooling retail sector is reflected in Glenigan data which shows that the value of new retail projects starts fell by 13% in the first nine months of 2017, compared to the period last year.

Perhaps, one bright spot for contractors may be the potential to convert high street space for alternative uses. Debenhams, for example, recently announced it was planning to use some of its surplus retail space for in-store gyms.

The contrast between the property market in London and the rest of the country is also highlighted in the RICS survey. Rents expectations for secondary retail and office space are negative although they are marginally positive for prime office space – where most new construction is focused - and flat for prime retail.