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Commercial Property Market Review

The economy has been in recession for some time now. Consumers have been affected by large price fluctuations, with little chance of pay rises in the Private sector due to the increasing levels of unemployment, and worsening performance by employer companies. On top of this is the significant reduction in loans being provided by the retail banking sector. The outcome, consumers are tightening their belts.

Companies are seeing not only reduced unit turnover of their products, but also increased pressure on their margins. This is reducing sales and profitability, and potentially ties up cash in excess stock. Corporate sector finance has become much harder to obtain, as the banks have reduced their lending, and companies are looking to rein in their investment plans.

Certainly the service sector is contracting, and manufacturing, whilst benefiting from the reduction in the value of sterling with increased export opportunities, is unable to take advantage of the value of sterling in export countries where recession is also a factor.
So what impact is all of this having on the commercial property sector?

The overall picture concerning property is that the ability of companies to move premises is constrained, with the various industry sectors being impacted in differing ways, according to the property type, local property considerations, and the state of the economy.

In the Office sector, vacancy rates are rising, indicating that there will be a downward pressure on rents being achieved by landlords in the coming couple of years. The Retail sector has been in the front line of reduced consumer spending, and consequently, a downward pressure on rental yields is also expected.

Industrial property has an excess of supply. Rents being achieved have been falling for some time now, and are expected to continue in the same manner for the next few years.
So where does this leave companies?

As with all things, it depends on your circumstances. If your company's lease is coming to an end, you can either move or negotiate a new lease for your current property, probably at a reduced rate. There are certainly some good deals to be had. Often Landlords will prefer to have a reduced rent, rather than an empty unit. The option to reduce fixed overheads for tenants will be appealing.

For Landlords, keeping tenants is the name of the game. Care needs to be taken in maintaining regular rental income, and in managing the landlord / tenant relationship. Increased levels of corporate failure will mean that thought needs to be put into planning differing tenant occupancy scenarios.

The key for both landlords and tenants is to plan ahead. This will help to flag up any impending issues and also opportunities, and in these uncertain times, flexibility may be the key to making the most of an extremely difficult economic environment.

Tim Allen
Associate Partner
June 2009

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