A tale of two halves for commercial property market
This year has been a tale of two halves for the commercial property market. Whilst the industrial and R & D sectors have seen significant value increases, unsurprisingly the retail and investment markets have struggled to keep up the pace and have seen falls in transaction levels, writes Philip Woolner, joint managing partner at Cheffins,.
With the collapse of High Street giants such as the Arcadia Group and Debenhams, the retail market has been a hot topic throughout 2020.
The reduction in footfall on the high street combined with the effects of COVID-19 has undoubtedly challenged retailers to an extent which couldn’t be foreseen.
However, this has not necessarily been the case for smaller or secondary units where we have seen transaction levels at the same rate this year as in 2019.
There has been an increase in stock levels throughout Cambridge and the surrounding area but these have been quickly filled with smaller or independent retailers, showing that demand for the right units in the right locations is still prevalent.
As landlords react to changing times and offer greater flexibility for tenants with new structures such as turnover-linked rents, we have seen that retailers still have confidence in the market.
Of course there will be some major holes left by the exit of larger corporations amongst the prime retail stock, however many of these are set to be taken by more regional, independent businesses.
A good example of this would be the recent letting of the former Café Rouge building on Bridge Street, Cambridge, to Middletons Steakhouse & Grill, a successful local business with its roots firmly in East Anglia.
Looking ahead to 2021, we are more positive for the retail market on a local scale and it will be interesting to see whether the challenges of 2020 will create a more varied High Street as independent traders continue to fill the gaps left by the national corporates.
The industrial sector continues to be the most desired throughout the commercial property space. With a dire shortage of stock and growing demand, prices this year have soared to around £12.50 per square foot for prime units.
Representing almost a 40 per cent uplift in values over a two year period, industrial property has benefitted from the coronavirus outbreak, as the likes of Amazon, DHL, Hermes and so on continue to escalate in their dominance of the market thanks to the prevalence of e-retailing.
Take-up has been incredibly strong over the past three or four years; however this has been exacerbated locally through a lack of prime property on the market.
Industrial developers have stepped into the breach here and a couple of new speculative schemes locally proposed at Bourn Quarter and Norman Park Bar Hill will add to the supply of quality space during 2021.
The newly built ‘mid tech’ units at the Enterprise scheme at Cambridge Research Park have now all been let to locally based technology companies achieving rents as high as £13 psf.
When it comes to investment and capital markets, industrial continues to be the go-to choice for many of the larger purchasers. Yields have been as low as around four per cent in and around London for industrial stock which is indicative of the confidence in the growth of the industrial market.
We forecast that industrial will continue to be the investment vehicle of choice next year and that demand from varied different occupiers will continue to push up prices with values maybe even reaching levels of around £14 psf for the best examples.
Another segment which has continued to see strong demand is the lab market. The life sciences sector continues to be the biggest player here and has shown insatiable demand for the best R & D stock available.
As the third quarter of this year saw £1 billion of investment into biotech companies in the UK, these occupiers are looking for the very best space in the Cambridge cluster.
Many of the science parks in the area are considering new build projects or major refurbishments and rents have continued to grow: Fitted lab space can achieve rents in excess of £40 per sq ft.
This represents an enormous 60 per cent value uplift in comparison to five years ago. COVID-19 has undoubtedly added fuel to the fire onto this already hot market.
Significant deals completed in 2020 have taken place at the Newnham Building at Chesterford Research Park and the 100,000 sq ft of space at the [email protected] building, both of which were both fully pre-let prior to completion, totalling approximately 150,000 sq ft. Cheffins was the letting agent. Rents achieved reached over £43 psf in some cases, representing an uplift of 15 per cent on last year.
On the other side of the coin, the office market has seen a drop in transaction numbers this year in comparison to 2019. Generally activity has been down, however this is not surprising due to the majority of the population working from home since the coronavirus outbreak, with occupiers considering their future property requirements.
However, as the most recent lockdown has shown, there is appetite for workers to return to the office and we therefore expect any reductions in requirements to be minor with many occupiers looking to use space more flexibly.
There will be a shift to improving the amenity facilities of a given office space, with increased emphasis on break-out areas, meeting rooms and so on, whilst allowing for flexible working and hot desking.
Values have held firm for office deals this year, with the prime examples asking £45 psf, such as at the 22 Station Road building which we are currently marketing on behalf of Mott Macdonald.
The Cambridge office market has always proved to be remarkably resilient and we expect this to continue over the coming years.
Of course investment into commercial property as a whole has seen a decline in transactions; however we suspect that as the world slowly returns to normal that money will return to bricks and mortar.
Investment flows into industrial units continue to be strong although office and retail purchases have dropped off this year as capital values decreased as a result of the current climate.
In spite of this, prolonged periods of lack of stock in the office market ought to help rents to hold firm whilst we expect that as confidence gradually returns to retail we ought to see some of the larger investment purchasers return to the Cambridge market.