A new comprehensive forecast of the commercial property market from Robert Irving Burns (RIB) has found commercial property price per sq ft is forecast to drop in Q1 2023.

The Office sector is predicted to see the largest fall in sales prices per sq ft, at -3.1%

A ‘buyers’ market’ predicted for the New Year, with supply forecast to increase 1.7%

In a survey of over 8,000 UK commercial estate agents, the Robert Irving Burns Commercial Property Report has forecast that commercial property sales price per sq ft is set to fall by 2.9% and rents per sq. ft falling 1.3% on aggregate.

Antony Antoniou, MD of RIB, commented: “While this is not, yet, the winter of discontent that some had predicted, we’re a far cry from the growth we were promised earlier this year. Predictions for Q1 2023 are decidedly negative as values and rents tumble off of a cliff edge.

“The latest and in my view unnecessary, Bank of England interest rate rise is only going to prolong the pain. It is the fastest tightening of monetary policy in the MPC’s history and with inflation subduing, raw material prices falling, five-year interest swaps dropping, and unemployment rates still historically low (3.7%), there is a real and present risk of stagnation in this sector – wiping up to £14billion off of portfolios at the latest estimate from Goldman Sachs.”

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% on average in Q1 2023. Close to a third of respondents (31%) believe that office sales prices could come down by over 5% 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% 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.

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% in the period and over 30% of respondents citing that prices would fall by more than -5%.

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% in Q1 2023, the sharpest decline among all the sectors, with a third (33.1%) of respondents indicating that rents could drop by over -5%. 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% on average, with a quarter of respondents (25%) predicting that prices will fall by more than 5%, 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 (Prologis -25% (YTD) Segro -41% (YTD) and Tritax Big Box REIT -39% (YTD)).

Rents: Rents are forecast to decrease, but only by 0.6% on average, with 39.1% 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.

Antony Antoniou concluded: “It will be a buyers’ market within the commercial property space, with the potential for commercial asset sale prices softening by -2.9% and supply of property rising by +1.7%. 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.”