Commercial market showing ‘tentative signs’ of recovery but retrofit and ESG key issues – Callaghan

by: Marc Callaghan, head of specialist finance intermediary sales, OSB Group
  • 09/07/2024
  • 0
Commercial market showing ‘tentative signs’ of recovery but retrofit and ESG key issues – Callaghan
The way we want to live our lives and the landscape of the commercial property sector has truly been transformed.

In the first article of our commercial series, we explore what’s going on in the market and current commercial trends.

The market showed tentative signs that it was shifting towards a recovery phase, although the current backdrop remains challenging given the relatively restrictive interest rate-setting alongside structural headwinds.

In keeping with this, 35% of respondents now view the market as having reached a floor for this cycle and 38% believe the market has entered the early stages of an upturn.

This view is in line with latest observations in the CBRE commercial index, which recorded a 0.2% capital value increase from March to May, at an all-property level. There are, however, differing fortunes for sub-sectors.

Office spaces, catering outlets and retail properties have had to adapt. And with consumer demand for higher quality comes increased commercial property investor responsibility. Future obsolescence is high on the agenda for decision-makers – should they refit or repurpose to maintain market attraction for the asset?

Commercial retrofit must outweigh costs

From an investment perspective, the required expenditure can only be justified if the returns outweigh the costs, including sufficient reward for the risks to investment capital.

Many of us consider sustainability to be a top priority for the properties owned and used by businesses. The regulatory standards for Energy Performance Certificates (EPCs) on commercial property should help with the shift towards sustainability, with the Minimum Energy Efficiency Standard (MEES) stating from 1 April 2023, that unless they have an exemption, it’s illegal for landlords to continue to let commercial properties with an EPC rating of an F or G.

However, this is not the final standard. The future minimum requirement is for all tenanted commercial properties to meet a minimum Band B by 2030, with a target of Band C by 2028. We’re already seeing tenants with their own ESG targets and standards only considering high-performing properties.

All commercial sectors have seen demand for high-quality space with good environmental, social, and governance (ESG) credentials. Occupiers are willing to pay a higher ‘green’ rent to meet their ESG commitments, and occupier demand is likely to increase as businesses seek to review the ESG credentials of their supplier network.

 

‘Rarely a one-size-fits-all solution’

There is rarely a one-size-fits-all solution, as the scope of commercial cases can vary wildly.

Commercial landlords who are looking ahead and trying to navigate long-term opportunities can really benefit from a funding partner with specialist teams that understand the nuances of differing property sub-classes and share an understanding of future occupier requirements to support the refit or repurpose strategy.

InterBay has a broad offering of specialist solutions for commercial property professionals and investors.

We’re here to support brokers and their complex cases as the landscape of the commercial market changes.

InterBay has the expertise to deliver the solutions you need, so stay tuned for the next article in our commercial industry spotlight series.

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