Demand continues to drop for office and retail space in the South West

Office and retail property in the South West continue to struggle with a further fall in demand, but industrial property is already showing solid signs of recovery, according to the latest RICS UK Commercial Property Survey.

The decline in demand continued in the last quarter, as a net balance of -31% of local respondents reported a fall in tenant demand at the all sector level. However, although the figure is firmly negative, this reading is less downbeat than Q2 2020.

Unsurprisingly, demand for South West retail space continued to fall with a net balance of –69% of local contributors reporting a drop. Demand for the region’s office sector also saw a fall with -50% reporting the drop. In more positive news, occupier demand has turned positive across the South West industrial sector. A net balance of +27% respondents noted a pick-up this quarter, up from -11% reported in Q2.

As demand drops, availability of retail property in the UK is unsurprisingly rising sharply. Space available in standard shops, shopping centres and department stores has increased significantly since the onset of the pandemic. Likewise, across the office sector, availability is picking up at the strongest pace (in net balance terms) since 2009. Therefore, availability in the region’s office and retail sectors grew again in Q2 whilst the growing demand for industrial space saw a net balance of -32% of respondents reporting a decline in available industrial space.

South West rental growth projections remain in negative territory for the office and retail sectors. Over the next year, prime office rents in the region are expected to fall by 4.4%. In the same time period, prime retail rents are predicted to fall by 12.5%. In contrast, local participants in the survey anticipate prime industrial rents to rise by 2.5% in the year to come.

Aside from the traditional segments, rental expectations are highly varied across alternative commercial property classes*. Hotels in the South display the weakest 12-month projections for rents with -70% contributors expecting a fall.

Student housing is also expected to see a fall, but 46% of Southern contributors expected rents for data centres to post solid growth over the year ahead. This sees respondents anticipating capital values rising for data centres (net balance +43%) over the year to come.

Tarrant Parsons, RICS Economist, commented: “Sentiment across the commercial property market continues to be weighed down by the challenging economic backdrop. In particular, the physical retail sector, which was already struggling prior to the latest crisis, is being hit hard by the accelerated switch into online shopping and a drop in footfall associated with social distancing. Likewise, occupier demand across the office sector remains in decline and may continue to come under pressure going forward as businesses reassess their office space requirements following the increased prevalence of remote working.

“That said, some portions of the market appear to be well placed to expand in the face of these structural changes sweeping the economy. Indeed, the latest results point to a solid rebound within the industrial sector, with increased capacity in this segment needed to meet the sharp rise in online spending. As such, the twelve-month outlook for prime industrial rents and capital values has already returned to positive territory according to the Q3 survey feedback.”