Commercial property polarised as rents and values fall – RICS

Overall rents are expected to fall by around four or five per cent year-on-year by the middle of 2021, according to the Royal Institution of Chartered Surveyors (RICS).

However, this is likely to be highly segregated with retail properties expected to suffer the greatest falls, likely into double digits, while industrial and logistics spaces may even see rent and values rise.

RICS economist Tarrant Parsons told the Nara property receivers conference: “I don’t think there’s ever been a time where the market is so polarised at a sector level, but I don’t think it’s felt the full force of the economic consequences of what’s going on.”

Parsons added: “On average commercial property rents may fall by around four or five per cent year-on-year by the middle of 2021.”

“As of September estimates had rents down by two per cent based on the year before, so there’s still quite a way for rents to fall on this analysis, but that does mask what’s happening across the sectors.”

Retail and office turmoil

While the turmoil in the retail space has been exacerbated by the pandemic pushing more online shopping, the diversion away from office working is expected to make a significant change as well.

Parsons noted that property values in the retail space were already down by around 15 per cent this year, with office values dipping four per cent.

Demand for retail space is falling at sharpest pace since the late 1990s and vacancies are rising at the quickest pace on record since that period, according to RICS.

“Retail is in incredibly bad shape and it is difficult to imagine this getting better any time soon,” Parsons said.

Projections show rents in retail could fall by more than 10 per cent.

Demand for office space has plummeted with changes to working habits looking set to cause a lasting shift in how office space is utilised.

According to a RICS survey the most common expectation is for businesses to cut back between five and 15 per cent of office space, with an expected fall in rents of around five to seven per cent.

“We’re not talking about the death of the office sector, although 10 per cent would be a hugely significant shift,” Parsons added.

Industrial sector positives

In contrast, the industrial sector appears to be weathering the storm fairly well and has potential for growth afterwards.

Industrial buildings were worth only one per cent less in September than at the start of 2020, but they had started to show signs of recovery over the previous four months

“While the outlook is subdued, other areas do have potential to grow rapidly further ahead,” Parsons continued.

“Expectations are moving positive across industrial and logistics already with the growth of online shopping.

“And data centres are another example of a more positive outlook, that’s another area with pretty strong growth potential.”