The UK’s commercial property sector is an ever-evolving landscape shaped by economic forces, regulatory shifts, and changes in business demands. For both seasoned investors and newcomers, understanding the factors that influence the market value of commercial properties is essential.

This blog explores the latest trends in the UK commercial property market, providing data, insights, and investment considerations relevant to 2024.

Understanding Market Value in UK Commercial Real Estate

Market value in commercial real estate refers to the price that a property would likely fetch on the open market, factoring in location, demand, property type, and economic conditions. In the UK, recent economic challenges, including Brexit and the cost-of-living crisis, have impacted various sectors differently. Commercial properties, such as office spaces, retail spaces, and industrial warehouses, each hold unique value drivers.

According to the Royal Institution of Chartered Surveyors (RICS), commercial property values in the UK reached an estimated £1.3 trillion in 2023, with industrial and logistics properties contributing significantly. Prime locations such as London and Manchester continue to dominate with high values, but secondary markets are gaining traction as businesses decentralise from metropolitan hubs.

Key Types of Commercial Properties and Market Performance

The UK’s commercial property market encompasses various property types, each influenced by distinct market factors:

Office Spaces: The demand for office spaces has been impacted by the rise in remote and hybrid working models. According to data from the British Property Federation, office vacancy rates in London reached 12.8% in 2023, up from 8.5% pre-pandemic. While this has created a dip in market value for traditional office spaces, high-grade or “Grade A” office properties in prime locations retain their value due to demand for modernised, energy-efficient workspaces. With more companies looking to consolidate or downsize, co-working spaces have seen steady growth, providing flexible solutions for businesses.

Retail Spaces: The retail sector has faced challenges, with the continued growth of e-commerce and changes in consumer behaviour. As a result, high-street retail spaces, particularly in secondary locations, have seen a dip in market value. A survey by Colliers shows that high-street retail rents fell by an average of 15% across the UK between 2020 and 2023. However, mixed-use developments that combine retail, residential, and office spaces are on the rise, especially in urban areas, as they offer a diversified income stream and mitigate vacancy risks.

Industrial and Logistics Properties: The rise of e-commerce has led to a surge in demand for logistics and warehouse spaces, pushing their market values upward. Research from Savills indicates that the UK’s warehouse sector saw a record-low vacancy rate of just 3% in 2023. Locations near transport hubs, such as the Midlands and Greater Manchester, have become hotspots, with rents for large distribution centres rising by an average of 8% in the past year. Industrial properties continue to attract high investment due to their role in the supply chain and resilience against economic downturns.

Regional Trends in the UK Commercial Property Market

The regional variations within the UK have created unique opportunities for investors. London remains the core of high-value commercial real estate, particularly in areas like Canary Wharf and the City, where commercial office properties retain premium pricing despite broader market challenges. However, secondary cities like Birmingham, Manchester, and Leeds are becoming increasingly attractive as businesses decentralise, especially within the tech, finance, and creative industries.

According to JLL’s 2023 UK Property Market report, Manchester and Birmingham saw investment volumes increase by 12% and 10%, respectively, due to strong infrastructure and a growing talent pool. Regional growth is also driven by cost-efficiency, with office rental rates in these cities averaging between £30 and £40 per square foot, compared to over £100 per square foot in London’s prime locations.

Sustainability and ESG in Commercial Property Investment

Sustainability and environmental, social, and governance (ESG) criteria have become significant factors in determining the value of commercial properties. With the UK government targeting net-zero carbon emissions by 2050, investors are increasingly prioritising properties that comply with energy efficiency standards and incorporate green technologies.

RICS reported that in 2023, properties meeting stringent ESG criteria experienced a 5% higher rental income and a 3-4% increase in market value compared to non-compliant properties. Sustainable buildings with features like solar panels, energy-efficient lighting, and recycled materials are more attractive to tenants aiming to reduce their carbon footprint. Additionally, investors are often incentivised by grants or tax breaks when opting for green buildings, adding to the appeal.

Investment Opportunities and Risks in 2024

With the current dynamics in the UK’s commercial property market, there are notable opportunities, but also risks:

Opportunities: Investors have an opportunity to enter the secondary city markets, which offer a balance of lower acquisition costs and growing demand. Industrial and logistics properties also present an attractive investment option, given the stable demand driven by e-commerce. Additionally, co-working spaces in urban centres cater to the evolving needs of remote and hybrid work environments, presenting a modern solution for office space demand.

Risks: Economic uncertainty remains a significant factor. Rising interest rates, inflation, and potential regulatory changes can affect property values and profitability. The retail sector is particularly volatile, with shifting consumer behaviours and rising vacancy rates outside primary high-street locations. Investors must carefully assess location, tenant stability, and the economic resilience of their investments.

Future Outlook and Predictions

The outlook for the UK’s commercial property market remains cautiously optimistic. While challenges persist in certain sectors, the overall demand for well-positioned, sustainable properties in high-growth regions is likely to continue. The industrial sector, in particular, is expected to maintain robust growth, with a projected 5% increase in market value for warehouse and logistics properties by 2025, driven by continued expansion in e-commerce and the need for efficient supply chains.

The office sector may face a period of transformation as more companies adopt hybrid work models, but quality, sustainable office spaces will remain valuable in core urban locations. Meanwhile, retail spaces may see further repurposing, with investors shifting towards mixed-use developments that blend residential, retail, and office facilities, adapting to the changing needs of consumers and tenants alike.

Conclusion

In summary, the market value of UK commercial properties in 2024 is being shaped by evolving work practices, consumer behaviours, and sustainability requirements. By focusing on regions with growth potential and properties aligned with modern demands, investors can find opportunities even in a challenging economic environment. As the landscape continues to evolve, a data-driven, forward-thinking approach will be essential for success in the UK’s commercial property market.