Activity in the UK commercial property sector remains “relatively downbeat”, according to the Q3 market monitor report from the Royal Institution of Chartered Surveyors (RICS).

The data shows tighter financial conditions and a sluggish economic backdrop have weighed on activity across both the investor and occupier markets. 

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. As such, this measure continues to signal a modest overall decline in occupier demand. 

Taken apart, both the office and retail sectors exhibit a clearly negative trend in tenant demand, posting respective net balances of -19% and -25%. Meanwhile, for industrials, the latest net balance of +3% points to stalled demand growth over the quarter and is the softest reading since Q2 2020.

More than 75% of contributors to the report envisage pressure on corporate cash flows intensifying over the next year. However, while the outlook for overall rents and capital values is still “slightly negative”, there is somewhat better performance anticipated across prime markets as well as for some alternative sectors.

In terms of availability, respondents continue to cite an increase in overall vacant space in both the office and retail sectors. On the back of this, the use of incentive packages, such as rent-free periods, continues to climb.

Investor demand trends were again subdued in Q3. Overall investment enquiries posted a net balance of -21%, representing the fifth consecutive quarter where this indicator has been in negative territory. Looking at the sector level data, while the Q3 net balance of zero for industrials points to a generally flat picture for investment enquiries (marginally improved on -2% seen last quarter), the latest readings remain altogether more downbeat for offices and retail at -33% and -35% respectively.  Twelve-month capital value projections also remain negative across most traditional market segments.

RICS Senior Economist, Tarrant Parsons, 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.”