Demand dives for offices and stores as shoppers and workers stay home

Tom Belger
·Finance and policy reporter
·4-min read
A morning commuter crosses London Bridge in central London
Demand for office space has plummeted. Photo: Victoria Jones/PA via Getty Images

Demand for office and retail space has continued to fall in recent months while demand for warehouse sites has leapt, as the coronavirus continues to reshape the UK economy.

“Retail vacancies are rising sharply, with standard shops, shopping centres and department stores all seeing a significant increase since the onset of the pandemic,” according to a new report by the Royal Institute of Chartered Surveyors (RICS).

“Likewise, across the office sector, availability is picking up at the strongest pace since 2009.”

A RICS survey of its members in the commercial property sector found the mood in the London property sector was especially “downbeat,” but 78% of respondents across the UK say the market is in a downturn.

“Empty rate charges, car parking charges and the ability for retailers to surrender leases without obligation are ruining the market,” said Anthony Fine of property investors Warrant Investments.

Several leading landlords have reported rent collections well below usual throughout the year, and many well-known retailers and food and drink chains have pushed hard for rent cuts.

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But the picture for industrial space is more promising for property owners, with booming online shopping boosting demand. “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,” said Tarrant Parsons, an economist at RICS.

A large majority of surveyors expect industrial rents to continue to rise for the year ahead, compared with widespread expectations of declining retail and office rents.

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“The logistics sector has been extremely busy since lockdown as a result of the massive increase in online sales. Most of the major parcel distribution companies have taken on extra space as has a well-known online retailer,” said Simon Haggle, a Newcastle-based surveyor at Knight Frank, in his survey response.

Simon Heilpern, head of real estate at merchant banking firm Salamanca Group, said: “New world – tech, data centres, industrials, essential housing. Old world – offices, retail. The new world is the only prudent way to go.”

It comes as logistics firm Prologis said on Thursday it had completed the largest industrial logistics sale on record in Britain, selling 22 buildings for £473m.

“With online sales unlikely to drop back to pre-COVID levels, and many companies seeking to store more goods in the UK to ensure supply chain resilience in light of both the current pandemic and Brexit, we felt the time was right to bring the portfolio to market,” said UK regional head Paul Weston, with the sale reflecting the company’s focus on logistics park ownership rather than standalone buildings.

The two-speed market tallies with separate industry data on the fortunes of the services and industrial sectors.

Recent purchasing managers' index (PMI) figures for manufacturing output have been stronger than activity levels reported by services firms, which have been more hobbled by coronavirus restrictions on social contact.

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There remains considerable uncertainty in the commercial property market given the scale of upheaval so far, the virus’ resurgence and questions over how temporary or permanent changes will be.

“Office occupiers remain reluctant to make decisions while future working patterns remain uncertain, although there are some lettings occuring at the smaller end of the market,” said Jonathan Vanstone-Walker of London property agency TSP. “There are very few post-lockdown transactions, meaning valuations are difficult, and little availability for investors.”

But some town centres are already seeing major shifts underway through office spaces being converted into homes. David Mcneill-Richardson, of Stamford House Securities in Bedford, said there was “moderate to good demand for office space due to many older town centre offices being redeveloped as residential.”

Some high streets outside major city and town centres also appear to be faring better than more built-up areas, as more office staff who live nearby are working at home.

Rosie Weller, a surveyor in west London, said there was “still good demand for secondary shops in residential areas.”