2023 outlook for UK commercial real estate

As we are all coming out of the pandemic and trying to put it behind us our daily lives have now changed forever and they way we use commercial real estate will not be the same again. In 2022, into 2023 and likely beyond, the change in use of commercial property has led to changes in the rental income that can be achieved, creating valuation challenges and transaction disruption.

The current economic crisis largely caused by the Ukraine war and exasperated by UK government policy errors is creating uncertainty in the UK and therefore in the real estate industry. Those holding the purse strings are understandably more cautious when project planning due to high cost of borrowing, inflation pressures and workforce challenges.  This is contrary to the need to upgrade or change the use of commercial property to fit our post pandemic uses and needs.

Retail

Coming out of the pandemic high street retail continues to be poor performing with consumer habits now firmly moved online.  This is a trend that had started pre pandemic as technology expands opportunities and ways to improve the life of the consumer.  This was exasperated in lockdown with many retail companies going into administration or moving their brand 100% online.  There are many strong specialist retailers bucking this trend, however, they now have the power over the landlords and price per sq. ft is falling.  Thus, retail is not seen as the investment opportunity it once was and this is set to continue.

Offices

Returning to the office was the big topic of 2022 – ‘How many times do you have to go into the office?’ was the new networking small talk.  Offices are no longer in use to the extent they were pre pandemic and the requirements are being driven by changing employee expectations for more modern environments, environmental consideration, hot desking and break out options.  Office stock, particularly older property, is now left vacant with owners, investors and local government all looking for options to improve the stock or change in use planning applications.  It is therefore unsurprising that there is an expansion of office to residential conversions to meet the UK housing demand as well as being seen as the saviour to failing office investment.  This trend is set to continue with Class A office space being more and more in demand in 2023 as employees expect Hybrid working and a high-quality office space as a trade-off for having leave the comfort of working from home.

Industrial warehouse and logistics

The Industrial warehouse and logistics industries have been strong for the past decade.  This has largely been driven by the increased need for large warehouse space to facilitate online shopping distribution networks, often referred to as the Amazon effect.  This industry is a clear winner from the pandemic and there is no sign this will slow, however, the saturation of online markets, rise in fuel costs following the Ukraine war and the constrained resources of delivery drivers following Brexit are all contributing factors to curb the speed of growth in 2023.

Commercial real estate investors

There are clearly changing opportunities for commercial real estate investors and emerging into the market is the need for space for data centres, life sciences and environmental R&D.  There will be continued economic uncertainty in 2023 keeping tenants in a strong position of power and landlords torn with the opportunity to develop in an environment of rising costs, higher intertest rates and supply chain issue.

If you require any further information and advice regarding the topics discussed in this article please contact Anne Dwyer.