Tenant demand for commercial property weakens

Tenant demand for commercial property fell to 2003 levels, says the latest RICS’ Commercial Property Survey.

Surveyors reported that business demand for commercial property fell in the fourth quarter of 2007. -12 percent more Chartered Surveyors reported a rise than a fall in demand compared to -2 percent in Q3. All sectors reported a fall for the first time since Q1 2003 when the net balance was -20. The number of surveyors reporting a decline in office demand moved into negative territory for the first time in over four years while the retail sector saw the biggest declines of all sectors, even surpassing the falls recorded in 2005 when the economy was slowing more appreciably. In fact, demand in the retail sector fell at the fastest pace in six years as a slowing housing market and the recent credit turmoil began to weigh upon both retailer and consumer confidence.

New buyer enquiries also fell across all three sectors having previously held firm against credit market jitters. The retail sector witnessed the sharpest decline in enquiry levels with the greatest declines in Central London and Wales. As with demand, the number of surveyors reporting a fall in enquiries fell to the worst level since Q1 2003.

Looking forward, surveyors continued to be pessimistic as a bleaker outlook was anticipated across all sectors. Surveyor confidence in the office sector turned negative for the first time since 2003, while in the retail sector, confidence dipped to its lowest point in 6 years. Rental expectations turned negative for the first time in over four years with surveyor optimism dented across all sectors.

The credit market turmoil continued to have a negative impact on investment into commercial property assets with capital values declining across all areas. Surveyors reported declines in capital values within the office sector as the net balance dropped from -17.3 to -47.8 percent. Recent financial turmoil has seen investors re-price risk. In the retail market the net balance of capital values fell from -20 percent to -48 percent.

Commenting, Simon Rubinsohn, RICS chief economist said: “Pessimism regarding the near term economic outlook has started to make serious dents in market sentiment as surveyors start to see the previously strong office sector join the retail market in decline. While finance remains scarce, commercial property’s continued reliance on capital funding could see the market dip further.”