Plummeting commercial property - an alternative to buy to let?

A new survey of over 8,000 commercial estate agents indicates a challenging 2023 - suggesting a possible alternative investment option for residential landlords.

The survey, conducted by investment service Robert Irving Burns, suggests that the sale price of commercial property price per square foot is to drop 2.9 per cent in the first three months of this year alone. The office sector is predicted to see the largest fall - 3.1 per cent over the quarter - while supply is set to rise 1.7 per cent. 

Antony Antoniou, RIB managing director, says: “It will be a buyers’ market within the commercial property space, with the potential for commercial asset sale prices softening by 2.9 per cent and supply of property rising by 1.7 per cent. Over the last few years certain parts of the sector have undoubtedly been hit harder than others, primarily retail and latterly non A-Grade the Office sector, but even the Industrial sector, which has previously been immune to market volatility is now succumbing.

“The supply of commercial property across the Retail, Office and Industrial sectors is the only thing which will be going up next year, so we will expect to see those long term investors, REITS and funds, who have been keeping their powder dry, returning to the market and taking advantage of this window of opportunity, before it closes.”

In detail the different commercial sectors have been analysed by RIB which says:

Office

Sales: In spite of the resurgence and innovation we have seen within the urban office market post the pandemic, sales prices per square foot are predicted to plummet by 3.0 per cent on average in Q1 2023. Close to a third of respondents believe that office sales prices could come down by over 5.0 per cent in the period.

But it will be a tale of two markets, with prices expected to be protected in the luxury and highly sustainable segment within the market, and those with lower quality specification and energy efficiency suffering the brunt of this downturn.

Rents: While rents are forecast to drop by 1.4 per cent in Q1 2023, close to a third of respondents (31%) felt that rents would remain flat over the period. Again, the devil is in the detail here, and it is the CAT A +, high quality flexible spaces which will see the most resilience in terms of their rental value.

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Retail

Sales: Retail continues to drag its feet, and while the weather, cost of living crisis and industrial action will have taken some of the shine off the ‘Golden Quarter’, it is Q1 2023 which will do the most damage to property values, with sales prices per square foot expected to drop by an average of 2.9 per cent in the period and over 30 per cent of respondents citing that prices would fall by more than 5.0 per cent.

It is the much suffering high street and hospitality sector which is expected to feel the brunt here, with many commenting that suburban prime retail will continue to be in high demand as hybrid working becomes more prevalent. However, the change in Business Rates next year might look to offset this, with bricks and mortar retailers paying significantly lower business rates, while operators of large warehouse and logistics facilities will see their bills jump.

Rents: Rents are forecast to drop by 2.1 per cent in Q1 2023, the sharpest decline among all the sectors, with a third of respondents indicating that rents could drop by over 5.0 per cent. However, there is certainly potential rental growth for high street retail in line with inflation over the year.

Industrial

Sales: The industrial honeymoon has come to an end it seems, and after years of successive growth sales prices per square foot are forecast to drop 2.7 per cent on average, with a quarter of respondents predicting that prices will fall by more than 5.0 per cent, which is an unprecedented drop. The industrial and logistics market remains strong from an occupational point of view, due to ongoing demand and growth from the online retail sector and a lack of supply, especially in areas of strong transport communications.

It is clear to see the market coming off the boil when looking at the share price and value of the REITs in this space, with the majority seeing double digit share price losses this year.

Rents: Rents are forecast to decrease, but only by 0.6 per cent on average, with 39.1 per cent of respondents forecasting they will remain flat in Q1 2023. Respondents commented that the growth of the sector will vary dramatically depending on the location and size of the units. London is expected to stay positive, but will see a much slower growth trajectory. However, big box logistics and sheds nationwide will see lower demand, alongside lower supply, so rents will at least hold. In contrast, smaller sheds and poorer locations could see demand drop and rents follow.