The latest UK Commercial Property Monitor Q1 2023 suggests quality over quantity is priority for commercial occupiers, as prime office rents forecast growth
Prime office rents are expected to rise across regions, with both office and retail rents predicted to pick up marginally in London, according to the latest Global Commercial Property Monitor from the Royal Institution of Chartered Surveyors (RICS).
The Q1 2023 outlook sees a subdued but strong market, as a rising share of respondents now feel economic conditions are stabilising (or beginning to improve). The industrial sector in particular, has seen renewed business momentum.
Overall figures are sub-par but show signs of improvement
The headline net balance for tenant demand came in at -3% (net balance) in Q1, a positive improvement on -20% (net balance) in Q4.
Within this, the industrial sector saw a pick-up in occupier demand, registering a net balance of +16% vs +6% in Q4.
Retail demand continues to drop
Tenant demand was flat to marginally negative for office space (net balance -6%) and continued to fall across the retail sector (net balance -23%). Even so, in both instances, this was less negative than in the previous quarter and prime offices are more positive.
Looking at rent, the net balance of respondents predicting an increase in prime industrial rents over the next twelve months rose from +40% in Q4 to +58% in Q1, and from +6% to +23% for secondary industrial rents.
The outlook for rents remains negative for prime and secondary retail outlets, although the net balance of respondents expecting falls did moderate.
Prime office rents look strong across the UK, but particularly in London
For the office sector, there remains a stark contrast between prime and secondary, with the former expected to see solid rental gains (net balance +29%) while rents are seen falling across the latter (net balance -37%). Anecdotal remarks continue to cite ESG factors as an important driver of demand for some offices.
When looking at broad regions a net balance of +38% of respondents are predicting prime office rents in London rising in the year to come. Although growth in prime office rents is also seen across the South, Midlands and the North, expectations are not quite as elevated as those in London (in net balance terms).
Industrial rental growth expectations are particularly buoyant across the Midlands. Both prime and secondary retail rents are projected to fall across most parts of the UK. Interestingly, however, rents are now anticipated to pick-up marginally for prime retail space in London.
Investors are slowly becoming less cautious
Investor demand posted a net balance of -14% in Q1. Although this is the third consecutive quarter with weak enquiries, the latest figure is less downcast than the reading of -30% seen in Q4.
Indicators tracking overseas investment demand remained in negatives across all three traditional market sectors.
The monitor indicates the commercial market remains resilient
Senior Economist for RICS, Tarrant Parsons, commented: “Although the picture across the UK commercial property market remains generally subdued in the face of higher interest rates and a soft economic outlook, the latest survey feedback tentatively suggests that the most difficult period for the market may now have passed.
“Indeed, capital value expectations for industrial assets returned to modestly positive territory having fallen sharply at the end of last year. This improvement has been supported by still solid occupier conditions across the sector, with demand for industrial space continuing to outstrip supply.
“Likewise, many of the more alternative sectors such as aged care facilities, life sciences, data centres and student housing display a resilient outlook for the year ahead. By way of contrast, secondary office and retail properties continue to struggle, evidenced by rental and capital value projections remaining deeply negative across both segments for the coming twelve months”.
You can hear more about the survey findings in a RICS webinar
A panel of leading participants in the RICS Global Commercial Property Monitor will discuss the survey findings and give insights into the UK property market, such as the projected increase in prime office rents.
‘A New Cycle for CRE?’ will take place from 4pm BST today (27 April). You can join the webinar here.
