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RICS survey: pandemic raises questions across the office sector

As the Coronavirus crisis continues to take its toll across the globe, results from the Q2 2020 RICS UK Commercial Property Survey point to a further deterioration in conditions.

In Q2, a net balance of -55 per cent of respondents reported a decline in occupier demand. Each sector covered saw a fall, and although the decline in tenant demand was most felt in retail and office space, net balances of -86 per cent and -79 per cent respectively, a fall was also seen in demand for industrial units, with 13 per cent more respondents seeing a decline. This is the first time that the industrial series has seen a negative response since 2012.

Given the economic fallout and lack of demand from tenants and business, the near term outlook for rents is now negative across the board, deteriorating further since Q1. A net balance of -85 per cent of survey participants expect retail rents to decline in the coming three months, the poorest reading since 2008. In the office sector, a net balance of -62 per cent (Q1-24 per cent) are predicting a further fall in rents. Contributing to the adverse sentiment around offices, 93 per cent of respondents anticipate that businesses will scale back their space requirements in the coming two years.

Although interest in retail in general has fallen, some anecdotal evidence in the survey points to opportunity and interest in secondary units, in some instances perhaps due to the potential for conversion to housing as well as appetite from some independent businesses looking for space in local highstreets. This is perhaps indicative of a broader shift around commercial location in the wake of the pandemic.

When respondents were asked if they felt demand for office space in suburban locations may rise in place of urban centres over the next two years, 64 per cent felt this shift would occur. This not only suggests there could be some significant changes in store for the office sector moving forward, but also interestingly, a potential driver for regional high streets. Anecdotal evidence also suggests there will also be a shift to higher quality office space, with more focus on well-being and sustainability.

Looking further ahead, twelve month rental expectations are now predicted to fall by four per cent and seven per cent for prime and secondary office space, and secondary retail rents are seen falling by 14 per cent while prime retail rents are seen posting declines of around 10 per cent. Sentiment is much more resilient across the industrial sector, although rents in secondary locations are seen falling by around one per cent in the year to come, prime industrial rents are expecting growth of just under two per cent.

Tarrant Parsons, RICS Economist, commented: “The latest survey feedback unsurprisingly reflects the significant disruption and uncertainty that emerged across the economy during the lockdown period. With demand from both occupiers and investors falling sharply, respondents now anticipate rents and capital values will come under downward pressure while the market adjusts to a drastically changed economic environment.

“In particular, the recent shift into remote-working raises many questions across the office sector, with respondents expecting businesses to re-evaluate their office space requirements over the next two years. On a brighter note, the outlook is already showing signs of recovery across industrial sector, which remains set to benefit longer-term from an acceleration in the growth of ecommerce.”

 

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