Office vacancies peak at worst rate since the global financial crisis

The amount of office space being brought back to market has seen the strongest rate of increase since the 2007 global financial crisis, according to RICS’ Q4 UK commercial market survey. The retail sector has also posted the sharpest rise in vacancies, in net balance terms, since RICS’ records began in 1999. Subsequently, surveyors “significantly” increased incentive packages for both retail and office tenants during Q4. In contrast, industrial availability has declined, with a net balance of -35% contributors reporting a fall in vacancy rates, from -14% in the previous quarter. Tarrant Parsons, economist at RICS, said: “With the UK economy facing a further setback towards the end of the year, hampered by a renewed tightening in restrictions, it is unsurprising that conditions remain challenging across portions of the commercial real estate market. “Both the office and retail sectors continue to see occupier and investor demand diminish, with expectations for rents and capital values remaining deeply negative for the time being. Having said that, the industrial sector seems to go from strength to strength.” Rental expectations Expectations for office rents were downbeat, with a net balance of -44% of respondents predicting a fall in rents for prime office space and -63% foreseeing a fall in secondary rents during the year to come. Similarly, 12-month rental projections failed to improve across retail, with net balances of -84% for prime (-82% in Q3) and -83% for secondary (-81% in Q3) properties. However, rents for prime and secondary industrial are both showing signs of solid growth, returning net balances of +66% and +35% respectively, up from +51% and +18%. Occupier demand On the occupier side of the market, a headline net balance of -27% of surveyors reported a fall in tenant demand over the quarter. This compares with a -55% net balance in Q2 and -33% equivalent in Q3. However, RICS noted that the industrial sector was “solely responsible” for boosting the Q4 result, with a net balance of +41% of respondents citing improved occupier demand, up from +22%. Retail recorded a -78% net balance, while offices posted a -63% equivalent. Investment and capital values A headline net balance of -12% of surveyors observed a decline in buyer enquiries in Q4, which RICS said was the most positive quarterly result since Q4 2019. However, the report noted this was largely offset by demand for industrial, notably with enquiries from overseas investors picking up during the quarter. On the back of this rise in demand, capital value expectations for the year were revised higher across the industrial sector compared with Q3. The net balance of respondents predicting capital value gains rose to +67% for prime assets, from +51%, and to +38% for secondary, from +21%. Expectations for prime office values improved to -35% from -50%. However, capital value projections for secondary offices remained static at a -64% net balance. Forecasts remained similarly negative across retail, with the net balance standing at -81% for prime and -85% for secondary. How alternatives will fare Surveyors also predicted that rents and capital values will fall sharply across the hotel sector in the coming year. Expectations are also firmly negative for student housing over the same timeframe. In contrast, there was broadly a flat to marginally positive outlook for both rents and capital values in multifamily housing. Later-living care facilities and data centres are expected to post solid growth in the year to come.   To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette