Despite difficulties experienced during the pandemic, the commercial property market is bouncing back in the first few months of 2022. The main risks to continued recovery are the emergence of any new Covid variants, rising energy prices and the economic effects of the Ukraine-Russian war.
Although negative forecasts predicted a gloomy outlook for retail and office spaces, recovery is now underway. The total returns for all UK property are forecasted at around 6%, with office investment rising by 20% and build to rent investment increasing by 65% this year.[1]
What is the outlook for each commercial sector?
Hospitality and leisure
For the most part, hospitality and leisure have survived the pandemic with the hotel industry expected to return to pre-pandemic levels by the end of 2022.[2] Those with strong capital reserves are increasingly investing in the hospitality sector.[3]
Revenue per hotel room in London is expected to reach between 43% and 86% of pre-pandemic levels. In the rest of the country, the figure is expected to be between 64% and 100%.[4]
As international travel opens up this year, it is expected that overseas visitors will return to tourist hotspots in the UK. Combined with flexible working lifestyles allowing more time for leisure, there is likely to be a positive impact on the whole leisure industry.
Logistics and industrial
The industrial and logistics sector was strong last year, and this is predicted to continue into 2022.[5] The imbalance between supply and demand will continue to mean this is a growth sector.
It is predicted there will be a demand for another 59 million sq ft of logistics space between 2021 and 2025 due to increased online shopping.[6] As consumers now expect to receive goods quickly, online retailers need the capacity to hold large volumes of stock.
This market does face challenges, however. Pressure to meet carbon reduction targets, a shortage of labour, and rising construction costs all have an impact.
Offices
The demand for office spaces is expected to return this year, driven by pent-up demand and the growth of the jobs market. Light, airy offices spaces with green credentials including energy efficiency will be more sought after. With flexible working now likely to continue occupiers are valuing offices set up for virtual collaboration and hot desking.
By the beginning of December 2021 global equity targeting office property in London was at a record £40.13bn and the demand for investment property in the UK remains high.[7]
Offices in older properties that are no longer fit for purpose can present an opportunity for investors. Spaces can be converted for other uses such as food retailers, gyms, and financial services under the Town and Country Planning (Use Classes) Order 1987.
Residential
Investment in multi-family housing, affordable housing, co-living spaces (shared houses) and single-family properties was strong in 2021, and this is expected to continue.[8] The build-to-rent market did not do as well due to travel restrictions and the rising cost of construction. However, a surge of activity is predicted as these difficulties ease.
The residential market is predicted to increase by 10% in 2022, particularly co-living which will be boosted by people returning to offices and travelling for work.[9]
Retail
CBRE is expecting the retail market to continue its recovery in 2022 as people spend savings they accrued during the pandemic.
However, global supply chain disruptions and price inflation risks continue to remain a threat to retail. In addition, the trend towards online shopping means that many high street stores have not weathered the storm.
Andrew Goodacre, chief executive at British Independent Retailers Association urged members to adopt a hybrid business model that combines physical retail space with online shopping[10]. Retailers, such as Hotel Chocolat, who have adopted this model continue to perform well.
Some shops saw an increased footfall during the pandemic. DIY shops, homeware stores, pet shops and convenience stores, amongst others, are continuing to perform well.[11]
Redundant retail spaces, like redundant office spaces, can provide opportunities for investors. Spaces can be adapted for other uses such as beauty salons, restaurants, coffee shops and more as people place an increasingly high value on leisure.
How will environmental, social and governance (ESG) affect commercial property?
The commercial property market will be strongly affected by environmental, social, and governance (ESG) criteria in 2022. The government is aiming to reach a net zero emissions target by 2050 and as a result, there will be an increasing demand for properties with a ‘green premium’. Those who invest in these properties are more likely to reap long term benefits.[12]
As stricter building regulations come into force beyond 2030 to drive down carbon emissions and reduce energy consumption, buildings that do not comply will not be able to compete in the market. Buildings with higher BREEAM ratings are becoming increasingly attractive to investors. New buildings in central London with higher ratings attract more occupiers and have lower voids.[13]
Talk to Insight Law commercial property solicitors
Insight Law Commercial Property Solicitors can advise you on the sale, purchase, finance and management of your commercial property. We can also assist clients by providing advice on draft heads of terms issued by landlords’ property agents and with the drafting and negotiation of commercial property leases across all sectors of the property industry.
We have extensive experience across a range of commercial property sectors, and the legal knowledge and expertise you need to make your investment a success. Our Solicitors can work proactively, in partnership with you, tailoring our service to your business goals.
To find out how you can benefit from our team’s commercial property advice please call 02920 093 600.
[1] CBRE, UK real estate to see marked recovery in 2022, says CBRE, https://news.cbre.co.uk/uk-real-estate-to-see-marked-recovery-in-2022-says-cbre/
[2] PWC, Encouraging signs for hoteliers, https://www.pwc.co.uk/industries/hospitality-leisure/insights/uk-hotels-forecast.html#:~:text=By%20the%20end%20of%202022,%25%20of%20pre%2Dpandemic%20levels.
[3] CBRE, UK real estate to see marked recovery in 2022, says CBRE, https://news.cbre.co.uk/uk-real-estate-to-see-marked-recovery-in-2022-says-cbre/
[4] PWC, Encouraging signs for hoteliers, https://www.pwc.co.uk/industries/hospitality-leisure/insights/uk-hotels-forecast.html#:~:text=By%20the%20end%20of%202022,%25%20of%20pre%2Dpandemic%20levels.
[5] CBRE, UK real estate to see marked recovery in 2022, says CBRE, https://news.cbre.co.uk/uk-real-estate-to-see-marked-recovery-in-2022-says-cbre/
[6] CBRE, UK Real Estate Market Outlook Mid-year Review, https://www.cbre.co.uk/research-and-reports/UK-Market-Outlook-Midyear-Review-2021
[7] CBRE, UK real estate to see marked recovery in 2022, says CBRE, https://news.cbre.co.uk/uk-real-estate-to-see-marked-recovery-in-2022-says-cbre/
[8] CBRE, UK real estate to see marked recovery in 2022, says CBRE, https://news.cbre.co.uk/uk-real-estate-to-see-marked-recovery-in-2022-says-cbre/
[9] CBRE, UK real estate to see marked recovery in 2022, says CBRE, https://news.cbre.co.uk/uk-real-estate-to-see-marked-recovery-in-2022-says-cbre/
[10] Retail Gazette, Retail 2022: What to expect in the year ahead, https://www.retailgazette.co.uk/blog/2022/01/retail-2022-what-to-expect-in-the-year-ahead/
[11] Carter Jonas, Commercial Market Outlook, https://www.carterjonas.co.uk/commercial-market-outlook
[12] JLL, Four ways green thinking can add value for investors, https://www.jll.co.uk/en/trends-and-insights/investor/four-ways-green-thinking-can-add-value-for-investors
[13] JLL, Four ways green thinking can add value for investors, https://www.jll.co.uk/en/trends-and-insights/investor/four-ways-green-thinking-can-add-value-for-investors