Commercial investors take long-term view as work and shopping habits change

A number of factors are combining to create interesting opportunities in the Office, Industrial and Retail markets. Changing working practices, new shopping habits and looming sustainability and energy efficiency legislation mean that a long-term view will be taken across the board. Rents are holding, however, or even recovering in many sectors so it’s a good time for prudent investors.

The Office market has seen a steady improvement since the start of 2022. While still inconsistent, we are seeing plenty of interest in areas under 1,000 sq ft from start-up companies with smaller teams wanting to work in the same space.

There are also improvements in space between 3,000 and 10,000 sq ft,) however, not a great deal of Grade A office space larger than this. We are currently marketing 45 Grosvenor Road, St Albans, which has 35,000 sq ft and at £35/sq ft this may suit existing businesses looking to relocate from London to the suburbs.

Some of the impact on rental value originates from ESG compliance where landlords have been required to invest in upgrades to their buildings. As a result, Grade A office building rents are rising to accommodate energy saving measures, and they will continue to rise as further technologies are added.

The industrial market is very strong, with few properties available inside the M25 area. Rents have risen strongly, however, we believe they will level out as other costs apply pressure, not least of which is energy. Some buildings that may have sold more quickly a few years ago have remained on the market due to the higher rental expectations of landlords. New buildings in Luton, Leighton Buzzard and Milton Keynes show rents rising strongly, however, these are the latest, most energy-efficient properties. The demand is exists, but it is possible that rent levels have now peaked.

In Retail, the market is returning to normal for key towns on retailers’ preferred lists, such as Birmingham, Manchester, Oxford, Leeds, Cambridge and Bath. There is also a resurgence in St Albans, exemplified by the Five Guys chain who just paid £115,000 pa for a new premises in the city centre. We are promoting a large furniture store in London Road, where rental value has increased from £90,000 pa to £125,000 pa and we have already agreed terms in that region.

Other strong market towns, such as Berkhamsted, Hitchin, Amersham and Marlow are seeing a steady recovery in rental value. Initially they fell from £115/sq ft pre-pandemic to £85/sq ft, they are now strengthening back to £95/sq ft. For smaller properties with rents below £25,000 pa there is still good demand. In Berkhamsted, Gails Bakery has recently taken on a new retail unit for £80,000 pa indicating good prospects in the right locations.

So, there is still strength in the retail market and landlords are holding onto their properties as they remain good investments, especially in the south where yields are around 4-5%. This isn’t the case further north where yields have hit 20% in the poorest performing towns. Shopping centres are showing some re-emergence by cutting down on the size of units, and adding some residential space to reduce the overall size of the shopping centre.

What we are seeing, and essentially have seen for some time prior to the Pandemic, is the key large cities staying strong whilst the smaller towns with poorly designed shopping centres are seeing a far reduced demand and lower rents.

These are changing times, with a number of factors in play. Many landlords must now consider converting commercial buildings to residential use or selling them altogether. We understand the number of office buildings being sold for residential use has increased by 25% compared to six months ago. With the larger, older buildings the overriding reason is the need for energy efficiency upgrades. Plus, there is supply available and new entrants would prefer a purpose-built building with modern services and amenities.

Within five years, by 2028, every building will require an energy performance certificate (EPC) rating of C, rising to band B by 2030. With most property currently rated band E, many landlords will be tasked with upgrading their properties or change their use. If they choose not to take action now, the costs will continue to rise as labour and materials required to make the changes become more in demand.

For some the improvements are as simple as a change in boiler, or converting from gas to electricity. However, other properties will require more fundamental improvements. Owners are advised to find out what obligations they have and begin planning now. The implications for new lettings and subsequent subletting agreements could be significant.

For further information on opportunities or commercial property advice, contact Ian Archer on 01727 843 232 or via email to ian.archer@argroup.co.uk.