Investment demand up in industrial and all commercial sectors in Q3 2024
Demand from investors in all commercial property sectors increased in the third quarter of the year compared to the same period in 2023, with industrial leading the way.
According to Rightmove’s new Quarterly Commercial Insights Tracker, on average demand increased by 11% for the four main commercial sectors – offices, industrial, leisure and retail – representing the biggest increase since 2021.
Demand for offices increased by 28% in the last three months compared with Q3 2023, while the equivalent figure for leisure was 14%. Retail, meanwhile, saw a 7% increase in demand. Industrial property, however, saw by far the greatest increase in demand, coming in at 34%. Supply was also up compared to Q3 2023, at 3%, driven by light industrial units and warehousing.
Rightmove’s Quarterly Commercial Insights Tracker analyses millions of data points from the largest and most engaged commercial audience in the UK, to track supply and demand over time. Demand is measured by all enquiries to commercial agents about listings for lease or to invest in via Rightmove.
The news comes after a difficult period for investment in commercial property, but can be explained, experts say, by the fact that the Bank of England decided to cut the base rate in August following a prolonged period of incremental increases as it sought to tackle inflation.
Interest rate reductions lead to increased investment in commercial property
The cut has already led to reductions in the cost of debt with further reductions to the base rate announced in November despite some arguably inflationary measures in chancellor Rachel Reeves’ first budget last month.
“We’ve seen some sharp increases in demand across all sectors in the investment market when compared with the same period a year ago,” says Andy Miles, Rightmove’s Managing Director of Commercial Real Estate. “A likely contributor is falling interest rates, which is course decreases the cost of capital and makes investing in commercial property more attractive.”
Claire Williams, Head of UK & European Industrial Research at Knight Frank, agrees, adding that a more benign economic environment has also driven confidence among occupiers and the general public alike. “This year, we have seen a return to a steady and robust occupier market, with take up of industrial space on a par with levels recorded in pre-pandemic years,” she says.
“With inflation now below the Bank of England’s 2% target and above inflation wage growth, the economic outlook and consumer confidence are improving. Consumers are starting to loosen the purse strings and spending more on discretionary goods, in turn driving demand for more delivery services. As a result, businesses are feeling more confident in pushing forward with expansion or relocation plans, thereby boosting demand for industrial and logistics facilities.”
She adds: “We expect both leasing and investment activity to further strengthen. We are in the early stages of an interest rate cutting cycle, and as debt financing costs reduce, we will see greater levels of activity from developers, operators and investors.”
However, while interest rates are generally thought to be on a downwards trajectory, John Mitchell, Managing Director at Christie Finance says that investors should not expect a return to the historic low rates seen in the years following the global financial crisis and before rates started increasing after the Covid-19 pandemic.
“Although the Bank of England base rate is starting to fall, there is an acceptance that rates are not going to return to the record lows experienced from 2009 to 2022,” he says. “During this 13-year period, investors became accustomed to borrowing very cheap money. Times have changed and there is now greater uncertainty.”
As a result, Mitchell adds, some investors are “potentially” diversifying away from residential investment and looking for higher yields. “Commercial property generally offers this,” he says. “Coupled with strong availability of bank funding, the commercial market is becoming increasingly attractive.”
The impact on the industrial and logistics property sector
At the same time, it is clear that the way in which the wider logistics industry operates is changing, not least in response to regulation and geopolitics, which could have knock on effects for landlords, developers and investors, as well as occupiers. “It’s a really interesting time for the industrial and logistics sector,” says Williams.
“Managing supply chains is becoming more complex, with a heightened emphasis on sustainability across global networks. Businesses now face growing reporting requirements and an increasing demand for supply chain transparency. Geopolitical threats and tensions are also reshaping international supply chains. Given the sector’s close ties to transportation and global networks, it stands at the forefront of these changes.”
As a result of these growing complexities, businesses are increasingly turning to specialist third party logistics firms (3PLs) to manage more of their supply chain infrastructure, according to Williams, which again could have knock on effects on real estate.
“These specialised firms leverage cutting-edge technologies—such as artificial intelligence (AI), big data analytics, and blockchain—to optimise supply chain ecosystems and offer end-to-end visibility and enhanced decision-making,” she says. “As these technologies become more widely adopted and logistics services are increasingly outsourced, we will see demand progressively focus on well-located, modern facilities.”
In other trends, the industrial sector is also leading the way in the leasing market. Demand to lease industrial commercial properties is up by 10% compared with the same three-month period last year, the highest of any commercial sector. Supply of property to lease is also up by 14% in the sector.
Changes to the market in the office leasing market
In the central London office leasing market, meanwhile, boroughs to the west, including Westminster and Kensington & Chelsea, are seeing a rise in demand, while the City of London returned to positive growth in Q3. By contrast boroughs to the east including Hackney and Tower Hamlets are seeing a drop in demand.
Download the Q3 2024 Tracker