After a challenging period for the investment market, demand from investors for all types of commercial property has bounced back – but industrial is leading the pack.
Andy Miles, managing director, commercial, Rightmove
That is one of the main messages to emerge from our latest Quarterly Commercial Insights Tracker, which analyses millions of data points to track supply and demand over time.
According to the tracker, on average demand, measured by enquiries to commercial listings on Rightmove, increased by 11% in Q3 compared to the same period in 2023 for the four main commercial sectors – offices, industrial, leisure and retail – representing the biggest increase since 2021.
Demand for offices increased by 28% in the last quarter compared with Q3 2023, while the equivalent figure for leisure was 14%. Retail, meanwhile, saw a 7% increase in demand. Industrial property, however, saw the greatest increase in demand, coming in at 34%. Supply was also up compared to Q3 2023, at 3%
The growth in demand is welcome news after a difficult couple of years for investment in commercial property, but can be partly explained by the Bank of England’s decision to cut the Bank Rate in August – following a prolonged period of incremental increases as it sought to tackle inflation. The base rate now stands at 4.75%, following another cut in November, the lowest it has been since June 2023.
The August cut led to reductions in the cost of debt and the expectation among City analysts is that further reductions to the Bank Rate will be forthcoming. That, however, may take longer than many were hoping. According to official figures published on 20 November, UK inflation rose to 2.3% in October and is therefore above the Bank’s 2% mandate.
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Most economists attribute the increase to higher energy prices after the average household energy bill increased by 10% at the beginning of October. It is also expected that some of the measures in chancellor Rachel Reeves’ first Budget, not least the increase to employer national insurance contributions and increased national living wage, may also prove inflationary. As a result, the Bank of England has indicated that it is in no hurry to make further cuts to the Bank Rate.
All that said, the direction of travel when it comes to interest rates is clear. It is also evident that lower interest rates are having a positive influence on the economy. According to research from Knight Frank, this year has seen a return to a steady and robust occupier market, with take up of industrial space on a par with levels recorded in pre-pandemic years. Added to lower borrowing costs, a healthier occupier market compounds positive sentiment among investors.
Of course, there is always the possibility of a shock event that throws the market – and we have seen a few of these in recent years – but as things stand, it looks like we are at the beginning of an interest rate cutting cycle, which should further drive greater levels of activity from developers, operators and investors.
To be clear, investors should not expect a return to the historic low rates seen in the years following the global financial crisis and before rates started increasing following the pandemic. But after the disruption of the last two years, there is every reason to be cheerful as the new year approaches.
By Andy Miles, managing director, commercial, Rightmove