The global pandemic continues to take its toll on the London commercial market, as the Q2 2020 RICS UK Commercial Property Survey points to a decline across the capital’s office, retail and industrial sectors.
In Q2, two thirds of respondents (net balance -66%) saw occupier demand decline. London’s retail sector has seen the biggest drop in interest with a net balance of 90% of respondents seeing a fall in demand rather than a rise. This is the largest drop for the capital since the survey began. With a national increase in people working from home, demand for office space also fell dramatically this quarter with a net balance of 80% of agents reporting the fall. Finally, for the first time since 2012, respondents reported a marginal fall in interest for London’s industrial space.
The fall in demand in response to the economic fallout means the near-term outlook for rents across London’s commercial sector is now negative across the board. Retail is unsurprisingly expected to see the biggest fall (-90% net balance) in rents over the next three months, with 6% more respondents expecting industrial rents to fall too. In the office sector, a net balance of 68% of London respondents expect rents to fall in the coming three months. Contributing to the adverse sentiment around offices, 93% of respondents across the UK anticipate that businesses will scale back their space requirements in the coming two years.
Although interest in retail in general has fallen, some anecdotal evidence UK wide in the survey points to opportunity and interest in secondary units, in some instances perhaps due to the potential for conversion to housing as well as appetite from some independent businesses looking for space in local highstreets. This is perhaps indicative of a broader shift around commercial location in the wake of the pandemic.
In another question asked nationally, respondents were asked if they felt demand for office space in suburban locations may rise in place of urban centres over the next two years. 64% felt this shift would occur. This not only suggests there could be some significant changes in store for the office sector moving forward, but also interestingly, a potential driver for regional high streets. Anecdotal evidence also suggests there will also be a shift to higher quality office space, with more focus on well-being and sustainability.
Looking further ahead, the twelve-month rental expectations for London’s retail space point to further decline, as rents are likely to fall by -11% and -17% for prime and secondary retail space over the coming year. Respondents expect slight growth in rents for the prime industrial sector. Finally, the capital’s office space is set to see rents fall by -5% for prime office space and -9% for secondary space.
Tarrant Parsons, RICS Economist said, “The latest survey feedback unsurprisingly reflects the significant disruption and uncertainty that emerged across the economy during the lockdown period. With demand from both occupiers and investors falling sharply, respondents now anticipate rents and capital values will come under downward pressure while the market adjusts to a drastically changed economic environment.
“In particular, the recent shift into remote-working raises many questions across the office sector, with respondents expecting businesses to re-evaluate their office space requirements over the next two years. On a brighter note, the outlook is already showing signs of recovery across industrial sector, which remains set to benefit longer-term from an acceleration in the growth of ecommerce.”
Hew Edgar, Head of UK Government Relations added, “The reduction in demand for office space in some locations could be used to counter demand for housing, something the Government has contemplated through recent loosening of Permitted Development Rights. However, the proposals are not right and have raised concerns around substandard homes, including building and space standards, all of which were highlighted in a 2018 RICS report.
“It is possible to deliver viable office-to-residential schemes through the more stringent planning permission process, this would maximise the existing asset base in a sustainable way, providing affordable homes in close proximity to pre-existing facilities while contributing towards community and wellbeing. New community hubs developed through repurposing and reusing building stock is greener, will support supply chain management in construction, and kick start SME activity; all of which contribute to a stronger and quicker economic recovery.
“With downturn there can be opportunity, Government must also look to replace uncertainty with stability; and fill the middle of the commercial sector polo mint. Offices and shops in city centres need support as people stay away from their normal workplace, and although local shop hubs are benefitting the market must be addressed as a whole.”