Almost two-thirds of respondents to the Q3 2021 RICS Commercial Property Monitor for the UK believe the market is in an upturn phase as tenant demand for offices increased for the first time since before the pandemic.

In Q3 2021, demand for commercial property across the office, industrial and retail sector increased for the first time since before the EU referendum result in 2016. This quarter 18% more respondents reported a rise in demand, primarily driven by the industrial sector. However, for the first time since well before the onset of the pandemic, 7% more respondents cited an increase in demand for office space. Once again, retail continues to struggle, as 18% more respondents reported a decline in demand for retail units. Although, this is the least negative reading since 2017.

There continues to be available space to rent in the retail and office sectors, (net balance of +28% and +34% respectively) yet respondents highlight the struggle to find available industrial space as supply continues to fall. As demand for industrial units continues to outstrip supply, it’s unsurprising that incentives are on a downward trajectory across the industrial sector, whereas to help drive demand for office and retail space, landlords are increasing the value of inducement packages on offer.

Looking to the year ahead, respondents envisage prime industrial rents to grow by 6% and secondary to pick-up by 4% (an increase of 3% from the previous quarter). In the office sector, prime rents are now expected to rise by 1% (up from a decline of 1% in Q2) whilst secondary office rents are less downbeat than previous (-2% up from -4%). For retail, prime rents are now project to fall by 2% and secondary by 5% (again both less downbeat than in Q2).

The UK commercial market also experienced a pick-up in investor demand this quarter, with 19% more reporting a rise in enquiries. Like tenant demand, investors are mostly interested in the industrial sector and least interested in retail. This sentiment is also echoed with international investors too.

As a result of the investor appetite, capital value expectations remain positive for both prime and secondary industrial assets for the year ahead, whilst retail values are expected to fall. Prime offices are now expected to see some appreciation but remain negative for secondary space.

Looking at some alternative commercial sectors, rents and capital value expectations are now anticipating growth across all sectors, as hotels return positive net balances for the first time since records began. Multi-family residential continues to post the strongest growth, but student housing is now displaying positive signs following pandemic restrictions lifting. 

In an extra question included in the latest survey, and a follow on from the RICS Sustainability Report released in August 2021, respondents were asked whether investors consider climate risks whilst making decisions. 71% of respondents reported this as an important factor which is up on the European average of 66%. However, sentiment is down from the August report when 75% of European respondents reported an increase in investors’ appetite for sustainable buildings.

Tarrant Parsons, RICS Economist, commented: “The recovery across the UK commercial property market appears to be gradually gaining traction, with headline metrics on demand moving a little further into positive territory during Q3. Supporting this, there seems to be some green shoots emerging across the office sector, with interest from both occupiers and investors rising slightly over the quarter. Nevertheless, this latest improvement needs to be viewed in the correct context, as it follows a particularly difficult period for the sector since the start of the pandemic.

“As it stands, the outlook for capital values over the year ahead is positive across prime office markets, with expectations being upgraded in the latest survey feedback. Away from the office sector, industrials are still anticipated to deliver the strongest capital value appreciation by some margin. Meanwhile, the backdrop remains challenging for retail, even if a significant degree of negativity has diminished compared with recent quarters.”