Commercial Real Estate Market Review
As the year draws to a close, now is a good time to review the commercial real estate market and attempt to predict future trends. Brexit of course continues to influence the market but what impact might a Brexit deal have on the market moving forward? Has the balance of power shifted from landlords to tenants?
Our team has been continually considering the impact of Brexit, particularly on the commercial real estate market in London and the UK. It is clear to us (and many others) that the uncertainty for investors brought about by the 2016 referendum has disrupted investment in the UK’s commercial real estate market.
The slow-down in the commercial real estate sector has been the sharpest since the 2008 financial crisis, with a 36% decrease in the value of commercial real estate deals in the second quarter of 2019 compared to the second quarter of 2018. The Financial Times has also reported a substantial fall of 34% in the value of commercial real estate deals between the first and second quarters of 2019. It is safe to presume that this slow-down is a result of continuing political uncertainty.
Many have asked whether the real estate market slow-down has been, or could be, beneficial to prospective buyers/tenants?
Take the office use commercial real estate market in London for instance. For decades, demand from occupiers has far exceeded the supply in the office lease market, with landlords able to pick and choose tenants at will. The substantial fall in the value of deals in 2019 would suggest that, as supply increases and demand drops, the balance would naturally shift to more of ‘buyer’s market’. This pattern could potentially be repeated across the commercial real estate sector, from office and retail (especially in recent months with the collapse of certain retail giants, for example) to bars and restaurants. This could mean that willing occupiers/buyers might be able to negotiate better terms than was previously possible. It may be the beginning of a power shift. For now though, it is probably too early to tell.
Commentators and market analysts have argued that any uncertainty caused by looming concerns over Brexit would, in any case, be short-lived. The resilience of the sector has been suggested as the reason for this. We saw similar levels of uncertainty in the run-up to the referendum in 2016, with a similar slow-down in the fourth quarter in the immediate aftermath of the referendum. However, the first quarter of 2017 saw a dramatic increase, with the value of deals almost doubling compared to the fourth quarter of 2016 (although there was a sharp fall in the second quarter of 2017). This indicates a remarkably similar trend to the decrease in the value of deals between the first and second quarters of 2019. This pattern was also the case in 2018 with the value of deals in first quarter of 2018 being high, followed by a drastic slow-down in the second quarter of 2018. These post-referendum trends indicate a strong market resilience and suggest that the market would see another positive bounce once Brexit, in whatever form it inevitably takes, is concluded. As with all Brexit predictions however, there remains a high degree of uncertainty and only time will tell.
To find our more about the market or commercial real estate more generally, please contact the head of our commercial real estate team, Artan Llabjani.
Alternatively, you can also contact one of our other solicitors in the Commercial Real Estate team here.