Significant repurposing of office space seen across the country
The UK commercial property market has seen modest gains in the first quarter of 2024, despite ongoing challenges, according to the latest survey from the Royal Institution of Chartered Surveyors (RICS).
Tenant demand increased by 4% in the first quarter, up from a -7% net balance at the end of 2023, with industrial sectors showing the most robust growth since the third quarter of 2022 at a net balance of +14%. Office spaces also saw an uptick in demand, the first since early 2022.
However, demand for tenant spaces is becoming more regionally divided. In London, office demand soared this quarter from +3% to +40%, while in other parts of the UK, demand remained stagnant or slightly declined.
Retail demand is stronger in London compared to other regions, while industrial property demand continues to be positive across most areas.
“Although sentiment remains relatively cautious regarding the near-term outlook across the UK commercial property market, the latest survey results do show some signs of recovery coming through,” said Tarrant Parsons (pictured), RICS senior economist. “For one, occupier demand growth now appears to be gaining traction slightly, supported by the broader economy seemingly returning to growth following a brief recession late last year.
“Moreover, the prospect of interest rate cuts later this year have already led to an easing in credit conditions across the sector, marking the first such improvement in our feedback since 2021. This should begin to support investment market activity as the year wears on, which, in turn, will likely see a more stable picture emerge for headline capital values.”
The survey also revealed that 89% of respondents are witnessing repurposing of office spaces for other uses, and 52% observed an increase in clients reducing their office space needs over the past year.
RICS anticipates rent increases over the next 12 months for both primary and secondary industrial locations, as well as prime office sites. However, secondary office locations are expected to see rent declines due to the impact of remote working and the Domestic Minimum Energy Efficiency Standard (MEES).
London leads with a +54% rent expectation, marking the highest forecast for Central London prime office rents since the first quarter of 2016.
“We welcome the latest survey results indicating signs of recovery starting to emerge,” said Dominic Collier, senior public affairs officer at RICS. “Yet at the same time, the uncertainly around non-domestic MEES is continuing to impact the sector. RICS is urging for decisive action in setting clear and achievable MEES targets.”
Collier added that the current proposed timeline and trajectory are increasingly viewed as unrealistic, and there are concerns about the lack of implementation mechanisms.
“Without action, there is a risk that up to 50% of commercial buildings could be stranded by 2035,” he said. “RICS is advocating, collaborating, and engaging with key stakeholders to drive meaningful progress and help establish clear, realistic, credible and forward-looking non-domestic property MEES targets.”
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