Property choice and the options ahead

Analysing a sample of over 4,000 properties currently on the market compared to the previous year has revealed how supply has changed during a critical part of the current recession. The research has reviewed property listings by commercial property agents from a variety of locations around the South East to cover a wide range of premises, from city centre offices to rural workshops, from science parks to industrial estates. Across the board the number of units on the market has increased by 29 percent in the last year.

The change is especially noticeable in the case of industrial/warehouse floorspace, up 47 percent across the sample, compared to the choice of office floorspace which is up 10 percent. However, supply measured by the number of office units available has risen by a slightly greater amount (18 percent), partly explained by a change in the average size of offices on the market which has fallen slightly (-6 percent). The average size of the industrial units on the market has increased by about 11 percent in the last year, which may be a reflection of companies stalling their expansion plans.

Consistent with this picture of increased supply, the study has also revealed that average marketing periods have been stretched by about a third over the research period. This is increasingly problematic for property owners caught by Business Rates levied on empty premises. Extended void periods combined with this additional tax burden also add considerable and unwelcome cost for our clients that would otherwise be contemplating speculative development. We are currently advising private and public sector clients on the viability and deliverability of development projects, including the sensitivity of financial appraisals to marketing periods, as well as potential yield shifts related to the market cycle.

So the broad picture is one of improved choice for the business community, although the underlying reasons for a change in supply may not be ones that businesses particularly sought. Nonetheless, there has clearly been a shift in the balance of power between the suppliers and customers of real estate; the key issue now is how landlords and tenants react to these changes. Tenants have a window of opportunity in the current market when checking the dates of forthcoming lease breaks or expiries could pay handsome dividends. A tenant’s threat of departure has real meaning at present and market conditions are ideal for renegotiating terms to save cost, to acquire better space, to achieve more flexibility or to otherwise extract value from leasing arrangements.

However, landlords and developers should also read the market carefully and consider switching from defensive to strategic mode – there are localised differences where pinch points in supply will become apparent due to a the non-delivery of new development (housing and commercial). There are also emerging demands from occupiers that represent new market opportunities for the property industry to address. For example, occupiers are increasingly adapting office space to facilitate more flexible working; in addition, legislation and consumer pressure are creating demand for premises that are environmentally sound – landlords need to be better informed about this and to respect the new currency of carbon.

Anecdotally, the market is now entering a phase in which it is less ‘paralysed’ by uncertainty – in response to a mood of improved business confidence the players want to resume the game. If this can be matched by a steady but sustainable increase in the choice of finance available to the economy, then we should see more activity in the commercial property market and opportunities for both landlords and tenants.

Simon Ward is head of research at property consultants Vail Williams LLP. Visit their website: www.vailwilliams.com