We are facing tough times. The on-going war in Ukraine, political instability closer to home, high inflation, spiraling utilities and the cost of living have all played a part in pushing the UK towards recession, one which is hoped to be shallow and relatively short.

We have faced recession before and survived and no doubt, we will do so again. But what can we expect from the commercial property sector in 2023?

Investment

Inflation is anticipated to fall towards the end of the year, with a correlating (if possibly slower) reduction in interest rates over the coming years.

While the current property market is certainly challenging in the short term, the anticipated reduction in both inflation and interest rates will provide new prospects for occupiers. In addition to opportunities for investors for those poised, (perhaps with cash) ready and able to act in the UK property market over the course and perhaps more favourably towards the end of 2023. With growth projected to return in line with falling inflation, returns on investments will begin to be more stable and attractive.

Taking into account the wider picture, some funds may find themselves currently real estate heavy and this will provide opportunities for others. The lower value of Sterling will also assist in encouraging non-domestic investment.

Sustainability

Following on from CoP26/ CoP27, sustainability will remain high on the agenda across the board in property matters, from developers and investors to end-users alike, with all parties experiencing high demand for demonstrably strong green credentials. 2023 will see increased regulatory intervention in this area. Specific funds set up with a sustainability focus may see deployment this year. Mandatory net zero targets will be significant, resulting in a shift away from the discussing of green matters to the actual implementation. Meanwhile, properties falling behind in terms of energy performance will become less and less attractive without investment to improve. Sustainability will inevitably creep into how properties are valued, as demand for all matters ‘green’ grows. While commercial minimum energy efficiency standards are not yet mandatory in Scotland (as they are in England), it is only a question of time. Prudent and forward-thinking landlords would be wise to take stock and take action, despite current market challenges.

Occupiers

With real estate pricing remaining relatively unstable and returns being less likely to be driven by capital growth, there are signs of a trend towards a greater focus on the financial performances of occupiers as an indicator of asset performance.

With that in mind, we consider briefly what 2023 may hold in the life sciences, office and retail sectors.

Life Sciences

This sector has benefited and will continue to benefit from investment from both the UK Government and private capital, which has seen the sector expand from the ‘Golden Triangle’ of Cambridge, London and Oxford. Notably in Scotland, Edinburgh, is attracting investment. Demand for available lab space is high and continues to be so.

It is encouraging to see the UK Government strengthen their commitment to the sector by announcing plans to continue R&D funding which, in turn, will aim to alleviate concerns around drug manufacturing global supply chains and an exposed overreliance on overseas markets.

This will undoubtedly present interesting opportunities in the medium to long term as the UK seeks to ensure it is competitive globally.

Office

The office market has witnessed recent changes due to increased agile working following the Covid pandemic resulting in many businesses downscaling their office premises. That said, demand remains strong for the best quality premises, as sustainability disclosure requirements move towards net zero. Additionally, occupiers will be prioritising premises with improved energy efficiency in a bid to ensure lower operational costs following increasing costs in the energy market. As mentioned above, opportunities exist for those owning commercial property with the ability to refurbish their premises to meet demand alongside opportunities for occupiers looking for a good deal on available and vacant lets.

Retail

The continued weakening of the economy, reduced disposable income and increased costs will continue to impact this sector. Companies may seek to rationalise their estates, closing poorly performing stores. But that could facilitate the opening of other, perhaps smaller stores in more profitable locations. A combination of lower rents together with shorter lease duration could provide new entities with an opportunity to trial a location, previously out of reach. Meanwhile, polarisation between luxury and value will likely become more pronounced, with both markets predicted to fare well. Consumer trend towards online shopping seems to be faltering, with higher delivery costs and companies starting to charge the customer for returns, seeing a return of footfall to physical stores, a trend which may continue into 2023. Welcome news for landlords and their lenders.

To summarise, while 2023 undoubtably commences in challenging waters, there will be opportunities throughout, with the market predicted to be more favourable towards the latter part of the year. If you require any assistance regarding your commercial property portfolio, please get in touch with any of our experienced team.