Commercial Property Predictions 2024 – Part One

It’s always going to be tricky to make forecasts about something as wide-ranging, varied and dynamic as the commercial property sector in the UK, but in this, the first of two articles, we’ve rounded-up some of the key real estate predictions for 2024, as set out by a range of respected and authoritative voices such as Savills, Deloitte and CBRE.

By extrapolating from the current market conditions, these predictions set out likely directions of travel and – all caveats aside – it is possible to discern wider trends which cut across different segments of commercial property.

These trends include a drive for quality in the commercial office sector, fuelled to a large degree by the shift to hybrid working and the need to attract and retain the best staff, and a premium placed on sustainability in property.

This latter has two main catalysts – consumer demand, which increasingly places a premium on businesses which can demonstrate a genuine green ethos (one which avoids any suspicion of greenwashing), and a range of legislative measures which will begin to impact during the course of the year.

Economic Overview

The inflation rate has been on a downward trend since hitting a peak of 11.1% in October 2022. It’s now widely predicted, given the easing on global energy prices, that the UK inflation rate will hit the Bank of England target of 2% in early 2025. Inflation of this kind has impacted on the commercial property market in two ways.

Initially, the reduction in the spending power of consumers has impacted sectors such as retail and hospitality directly, while in addition to this the main weapon wielded by the BoE in their attempts to bring inflation under control has been a ratcheting up of interest rates.

After a prolonged period during which interest rates remained negligibly low, the BoE attempted to tackle inflation by gradually shifting the rate higher from mid-2021.

Although the current base rate of 5.25% may seem low in historical terms, it was still the highest the rate had been for 15 years, puncturing the sense that lower interest rates had become a new financial and economic normal.

This has had a dramatic impact on everything from investment to housing (both rental and owned) and the costs faced by the retail, hospitality, leisure and office sectors.

The rate remained at 5.25% throughout the second half of 2023, and with inflation dropping it’s probably safe to assume that interest rates have hit a peak, and that the second half of 2024 could see the BoE cutting rates in an effort to stimulate growth.

Another key drag on the economy as we move deeper into 2024 is likely to be mortgage refinancing, as the rollover of fixed rate mortgages impacts on the amount of disposable income available to homeowners and renters having higher interest payments passed on to them by landlords.

It is also overwhelmingly likely that a general election will take place at some point during 2024, and that the incumbent government, keen to restore growth and some semblance of a ‘feelgood’ factor, will introduce measures such as tax cuts with the intention of stimulating growth in the economy and an uptick in voters personal fortunes as early as the budget planned for 6th March.

Offices

Any predictions concerning the commercial landscape for office space in 2024 need to be predicated on an understanding of the changing nature of office work. During 2023, the Chartered Institute of Personnel and Development (CIPD) published figures looking at the approach taken to flexible and hybrid working across the UK.

These figures made it clear that there had been an increase in requests for flexible working in the UK, and that 45% of organisations now have a formal hybrid working policy in place, with 24% taking a more informal approach.

The survey, which included data from employers and employees, stated that 83% of organisations now offer a form of hybrid working, with 52% of those requiring employees to attend the office in person for a minimum number of days per working week or month, and 46% not making this stipulation.

The most popular approach was for organisations to insist that employees attend the office for either two or three days a week. It is the reasons given by employers across all sectors – private public and voluntary – which are likely to inform any predictions made about the type and scale of commercial office space being sought in 2024:

• 60% – feel it will improve their ability to recruit and retain employees
• 60% – feel it will improve the work-life balance of employees
• 54% – regard it as a means of supporting the motivation and productivity of employees
• 54% – regard it as a means of supporting the mental health and well-being of employees

A flexible approach of this kind, it seems, is here to stay , so office space will need to be equally flexible. This means that many existing or older office spaces might need to be upgraded or modernised to meet the demands of this approach.

In turn, this will place a premium on quality office space, which will combine with a flexible approach in order to attract and retain the best employees, and should therefore be able to attract premium rental growth.

This demand for the best quality spaces means that those currently in development are likely to be snapped up quickly by ambitious occupiers.  According to figures published by CBRE, 37% of the space under construction in the UK as of December 2023 and due to be completed in 2024 had already been acquired. This pressure on supply is likely to ramp up the pressure on demand still further, and with it the kind of rental rates the best spaces can demand.

The same kind of premium pricing is likely to apply to those office spaces either already equipped to meet demands for greater sustainability, or with an infrastructure which means they can easily be modified to do so.

Older office spaces which present a degree of obsolescence when it comes to meeting these demands will find it much harder to generate premium rental rates, leading to something of a two-tier market place.

Retail

The retail sector in the UK is one which struggled, given the economic headwinds already described, to reach 2019 levels throughout 2023. It seems safe to assume that any meaningful growth in the sector, and certainly any shift toward pre-pandemic levels of activity, won’t even start to emerge until the second half of 2024.

Figures backing up this somewhat pessimistic take include the GfK consumer confidence measure which, despite improving slightly throughout 2023, took a plunge toward the end of the year and still remains firmly locked into a negative rating.

At the same time, figures published by the Office for National Statistics (ONS) showed that sales volumes across the retail sector remained lower than the levels seen in 2019 throughout 2023. The fact that interest rates are likely to remain at current levels until the second half of 2024, and that mortgage refinancing has the potential to impact on the spending power of many consumers, means that it seems likely that growth in the retail sector won’t kick in properly until the second half of 2024.

Until then, economic conditions will be such that the majority of people prioritise saving over spending, and limit the spending they undertake to more essential items. Those assets which occupy the grocery sector of the retail market are therefore likely to continue to perform well, given the relatively recession-proof nature of grocery shopping. Although it is still possible that supply chain issues may burst the grocery bubble.

Residential

The residential sales market took a big hit during 2023 as people attempted to cope with the long tail of the rise in mortgage payments triggered by the short-lived experiment undertaken with the Liz Truss premiership.

Although mortgage interest rates remain high in comparison with those enjoyed for the past couple of decades, they have come down from the peaks seen during late 2022/early 2023, and the base rate is expected to start coming down again in the second half of 2024.

This, coupled with lower inflation, is likely to stimulate activity in the housing market, and although prices may well fall a little across the board, the affordability of mortgages and competition in the sector is likely to bolster demand to such a degree that it remains level with that seen in 2023 – which is to say below the long-term average but no longer on a downward trajectory.

In terms of supply, slightly fewer than 90,000 homes started construction in the first half of 2023, and although this was 8% higher than the previous year it is still well below the amount most experts estimate is needed in the UK, and the planning landscape in the UK is likely to remain a drag on house construction.

In London, for example, planning applications were taking an average of 18 months to be approved in 2023, while in 2013 the same process took just over six months.  In addition to planning issues, the cost of financing developments has also acted as a drag, according to the RICS Construction Survey published in November 2023.

In this survey, two thirds of contributors cited finance as being the factor which limited their activity, a figure which is higher than at any time since 2020. In addition, many developers cited the issue of recruitment, with 40% highlighting the problems they had recruiting the likes of bricklayers, carpenters, plumbers and electricians.

The fact that this figure was slightly lower than it had been reflects a drop in demand for developments through 2023, rather than any improvement in the recruitment landscape. As the economy hopefully settles somewhat from the roller-coaster instability of recent years it’s likely that materials price inflation in the residential development sector will drop to a level of around 3% in 2024, massively down from the 2022 peak of 23%.

In a slightly more pessimistic frame of mind, the website finder.com – a personal finance comparison website – convened a panel of experts in November 2023, made up of the likes of economists, academics and mortgage and savings experts, asking them what they predicted would happen to the UK housing market between then and Autumn 2023.

While the experts agreed that a full-blown housing market crash was not on the horizon, they did reach a consensus that house prices would continue to fall, with 73% predicting a drop of 5%-10% and 18% opting for a drop of 7.5% – 10%. The experts were pretty much in agreement that the time-lag between the imposition of fiscal policy and any impact on the real-world economy means that the BoE will not be cutting interest rates until the latter half of the year.

In part two of our 2024 forecast, we will take a closer look at the potential threats and opportunities facing commercial property investors this year, as well as assessing the rural, logistics and hotel sectors.