Key insights into the commercial property market

Savills experts Mat Oakley, Director of Commercial Research, and Lucian Cook, Head of Residential Research, delivered a dynamic update on the commercial and residential property markets with Arbuthnot Latham clients. In this roundup from our October event, we focus on Mat Oakley's expert insights into the UK commercial property outlook, exploring the key trends and opportunities shaping the sector's future. 

Economic outlook and market optimism

Oakley began with an optimistic tone, emphasising that despite the challenging economic environment, there are three reasons to be cheerful about the future. 

• The UK economy – While having endured a period of flat or negative growth since 2021, the UK economy is forecasted to grow at an average of 2% annually over the next five years. This improvement in GDP is crucial for the commercial property market, as economic expansion drives demand for offices, shops, and warehouses.
   
• Interest rates – Mat suggested rates are likely to decline gradually towards 2%, a view shared by the Bank of England. Lower interest rates could boost property financing, potentially revitalising investment activity in the sector. 
   
• Employment growth – Particularly in London's financial and business services, employment growth is expected to outperform major global cities like Paris, Frankfurt, and New York over the next decade, which bodes well for the office market.
   

Prime yields and investment opportunities

Oakley noted that prime yields on assets such as offices are averaging around 6%, with retail offering slightly higher returns. He highlighted that the commercial property market is highly cyclical, with downturns and recoveries occurring at similar paces. This cyclicality creates opportunities for investors who can time their entry and exit points effectively.

He suggested that now could be an ideal time to invest, as prices appear low, especially in sectors like logistics and offices. While transaction levels have been low, particularly in London offices, the market may be nearing a turning point, signalling a potential bounce back.

Logistics: A popular investment

Oakley described logistics as probably the most popular commercial property asset class, referencing leasing activity for large warehouses and the demand drivers that come from the rise of online shopping. As he put it, “We do not think that people are going to be buying less stuff on the internet in 10 years' time vs today.” Leasing activity has returned to normal levels after the pandemic surge, but vacancy rates remain low, supporting rental growth.

He noted that the logistics sector has experienced significant rent increases, with average growth projected between 5% and 7% per year over the next five years. However, he cautioned investors to be mindful of potential obsolescence, as tenants increasingly prefer modern facilities, which could leave older warehouses struggling to compete.

Office market outlook is optimistic

Addressing the office sector, Oakley acknowledged the impact of agile working and the debate around the future of office use. He observed that London’s office occupancy remains below pre-Covid levels, contrasting with regional cities where activity has returned to normal. He attributed London's slower recovery to a few factors, such as commuting costs, but argued that flexible working has also had positive effects, such as improved workplace wellness.

Oakley was optimistic about office demand, noting that tenant requirements in London are currently 30% above the long-term average. Although vacancy rates have risen, rents have continued to grow, driven by a decade of underdevelopment in the sector. He identified city offices as undervalued, with yields in the City of London offering a wider spread than the West End, suggesting that investor concerns may be overstated.

Signs of recovery in retail

Oakley expressed enthusiasm for retail, especially as rents have rebased following a period of high vacancies and falling demand. He explained how vacancy rates in areas like Oxford Street have dropped significantly over the past 12 months, signaling a quick turnaround. Retail warehousing was also discussed as a popular choice among investors, given its low vacancy rate of 4.4%, which supports rental growth prospects.

He suggested focusing on regions with higher disposable income, where consumers have more spending power. Oakley cited recent activity from institutional investors in retail warehouses as evidence of renewed confidence in the sector. 

Mat’s final thoughts: Balancing safety and opportunity

Oakley concluded with a summary of sectors to watch. He pointed to logistics, life sciences, and data centres as reliable options for those seeking safer investments due to their strong fundamentals. 

However, he noted that there could be interesting opportunities in less fashionable sectors like shopping centres, food stores, retail warehouses, and even offices. According to Oakley, these areas could present value for investors willing to take on a bit more risk, given their current market conditions and potential for recovery.