The Intermediary – February 2025 - Flipbook - Page 40
SPECIALIST FINANCE
Opinion
What’s next
for commercial
real estate?
T
o say the commercial
real estate (CRE) market
has faced a challenging
five years would be a
huge understatement.
The story is wellknown by now. With the onset of
Covid-19 and lockdown, the CRE
sector was put on its knees, with
retail and hospitality outlets forced
to close and offices vacant. No sooner
had the world returned to something
resembling normality than runaway
inflation and the subsequent spike in
interest rates placed huge financial
strain on CRE landlords and asset
managers – and, crucially, on the
finances of the organisations that
leased and used these buildings.
Between 2020 and 2024, the
only question seemed to be how far
occupancy rates and valuations in
the CRE sector would fall. Overall,
UK commercial property values are
approximately 25% down on their
pre-pandemic levels. Meanwhile, data
from CoStar shows total volumes of
CRE sales in the UK totalled £26bn
in 2023 – the weakest annual return
since 2009 following the Global
Financial Crisis.
Rays of light started to puncture
through in 2024. Figures from CBRE
show that UK commercial property
delivered a total return of 7.7%, based
on growth in both rental and capital
values. Not only was this higher than
the total returns seen in 2022 and
2023, but it was also above the average
annual return of 7.2% recorded by the
CBRE UK Index since 2000.
Outlook for 2025
There were green shoots of recovery,
but one swallow does not make a
summer. 2025 is shaping up to be a
crucial year in determining whether
the return to growth can be sustained.
40
The Intermediary | February 2025
The early signs are positive. To cite
CBRE’s most recent data: “Capital
values for UK commercial real estate
continued to rise during January,
recording a 0.3% increase [...] Rental
values increased by 0.2% monthon-month, while total returns for
commercial property were 0.7%.”
Christian Smith, director at Savills,
said: “The outlook for 2025 [for the
CRE market] is fairly positive, with
more stability and improvements in
wider macro-economic factors.”
The word “fairly” stands out,
underlining the important trends and
challenges that investors must factor
into their decision-making.
Nevertheless, the outlook is positive.
Just as with the residential market, the
fall in interest rates is a critical factor
in fuelling that positivity.
Trends to watch
In truth, the predominant trends
across the CRE sector remain
similar to those that have dominated
discussions in the market over recent
years: the cost of debt, the rise of
remote working, and the future of
bricks and mortar retail.
As noted, the fall in interest rates
has been – and will be – essential in
injecting new life into the CRE sector,
allowing existing and prospective
investors to take a more bullish
approach in financing their portfolios.
We expect to see a lot of refinancing
activity among commercial property
investors in the coming months.
Trends in the office space are
perhaps a lile more nuanced. There
is a steady stream of headlines about
large organisations mandating a
return to the office – Amazon, Apple,
JPMorgan, Goldman Sachs, WPP,
BlackRock, HSBC, Google, IMB – and
many small to medium enterprises
(SMEs) have followed suit amid
PARESH RAJA
is CEO at Market
Financial Solutions
concerns around productivity and
collaboration.
Hybrid working remains
commonplace, but people working
more from the office has helped
stabilise the CRE market. While
occupancy rates are not on track
to return to pre-pandemic levels
– it’s unlikely they ever will – the
market has recalibrated, presenting
opportunities for investors now keen
to enter the market.
Finally, retail. A resurgence can be
seen here, as Mat Oakley, director of
commercial research at Savills, wrote
recently: “Having seen rents move
upwards across 2025 and investor
demand grow, we’re predicting that
2025 will see more institutional
interest in UK retail than in the
previous decade. Prime shopping
centres, retail warehouse parks, and
substantial high street parades should
all be buys in 2025.”
Lenders must respond
As ever, it is essential that lenders
monitor and adapt. Those with
products catered to commercial and
semi-commercial property must
not only ensure that brokers and
investors are suitably supported to
take advantage of opportunities in the
market, but they must also help them
understand how the sector is evolving.
Colliers predicts UK commercial
property returns will reach double
digits (11%) in 2025. But at Market
Financial Solutions, we know that
growth in this sector is only possible
if the right products and services are
delivered – it is essential we play our
part in working with brokers and their
clients to reinvigorate the market as it
looks to turn a corner. ●
