Tighter financial conditions and the sluggish economic backdrop are weighing heavily on activity across the investor and occupier markets, according to the Royal Institution of Chartered Surveyors’ (RICS) Q3 2023 UK Commercial Property Monitor.
More than 75% of contributors envisage pressure on corporate cashflows intensifying over the next year and the headline occupier demand indicator posted a net balance reading of -12% in Q3 – down marginally compared with the -10% reported in the previous quarter.
There is a negative trend in tenant demand for office and retail space, with the sectors posting respective net balances of -19% and -25%. The net balance of +3% points for industrials indicates stalled demand growth over the quarter and is the weakest reading since Q2 2020.
A net balance of +46% of survey participants foresee a continued rise in prime industrial rents over the year to come, although these expectations have moderated significantly. Prime offices are anticipated to deliver a small uplift in rental values over the year ahead (+21% net balance), but rents are expected to fall sharply across secondary office space (-47%). For the retail sector, a net balance of -13% of respondents expects prime rents to fall, with the outlook more downbeat across secondary retail (net balance -51%).
Overall investment enquiries posted a net balance of -21% in Q3 – the fifth consecutive quarter where this indicator has been in negative territory.
Tarrant Parsons, senior economist at RICS, said: “The UK commercial property market continues to feel the effects of higher interest rates, still well above target inflation, and weak prospects for economic growth over the near term. As such, investment activity remains subdued, while occupier market trends are also now clearly softening. This general pattern is reported right across the UK, with secondary office and retail premises seeing the brunt of the downturn, driven by both structural and cyclical dynamics.
“On a more resilient note, prime offices continue to outperform the secondary market, benefiting from a flight to quality post-pandemic and more attention around energy efficiency standards. Similarly, industrial demand is holding up better than other traditional sectors, even if the picture is far less buoyant than in recent years.”
