The year ahead: seven predictions for commercial property in 2020
Published by Knight Frank Newcastle
on 3rd January 2020
1. Global office markets: FOMO drives pre-letting and partnership
30% of the 75 global office markets Knight Frank monitor will be Landlord favourable in 2020, as acute shortages of high-quality office space continue to condition occupier behaviour.
In markets such as Bangalore, Dublin, London, Mumbai, Paris, San Francisco, Shanghai and Sydney occupiers will increasingly activate searches more than five years ahead of lease events for fear of missing out (FOMO). Accordingly, pre-letting activity will continue to rise as those occupiers seek best in class space that supports wider strategic ambitions. This pre-letting activity will quicken the transition from an adversarial to partnership relationship between Landlords and occupiers (AKA customers).
This partnership will be in growing evidence as both parties work jointly to create solutions in response to the growing challenge of sustainability or the on-going task of aligning business-planning horizons with real estate. The latter will bring a further suite of flexible office products to global markets, delivered either directly by Landlords or in partnership with operators.
Dr Lee Elliott, Global Head of Occupier Research
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2. UK to remain a dominant global destination for commercial real estate investment in 2020
“Despite a slowdown in investment over 2019 due to lack of stock and Brexit, the UK remained a top three destination globally for commercial real estate investment*. Regardless of election outcome, in 2020 we forecast the UK to remain one of the largest and most liquid markets, underpinned by robust fundamentals which could support a modest pick-up in volumes compared to the prior year. In the event of a strong conservative majority, we could see a drive of activity in the first quarter, followed by moderated growth in activity over the rest of the year as investors respond to strengthened sterling and the realisation that there will be several months at least of Brexit / trade deal negotiation to be worked through. We forecast a continued increase in overseas ‘safe haven’ investors looking at London as well as also low beta regional cities. We expect demand for the Specialist sectors and Logistics to persist over the coming year, as they can take advantage of continued structural and demographic changes.”
Antonia Haralambous, Capital Markets Research
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3. Demand for global commercial real estate investment to strengthen over 2020
“2019 saw central banks around the world lowering interest rates to support global growth in an arena of heightened geopolitical uncertainty. We expect this lower for longer, extra time environment to extend into 2020. Continued low and negative yielding bonds could encourage income dependent investors such as pension and insurance funds to further increase their allocations into commercial real estate.
In this late cycle environment, we also expect investors to focus on lower beta geographies over the coming year, where structural growth factors, such as education and innovation are combining to drive commercial real estate momentum. We anticipate demand for long income assets to continue, as well as assets which can benefit from demographic and other structural changes, such as in the specialist sectors.
Overlaying geographic and sector focus, we expect sustainability and ESG (environment, social, governance) investing to become pervasive across commercial real estate in 2020. A combination of regulatory, risk and return factors will drive investors to increasingly target real estate with strong ESG potential.”
Victoria Ormond, Partner, Capital Markets Research
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4. London Offices: five years of rental growth to come
"Despite the ongoing Brexit talks, we are still seeing many businesses pressing ahead with expansion or relocation plans. This is against a backdrop of a severe lack of options and an office development pipeline that continues to be raided, which is why we are forecasting continued rent rises over the next five years. Prime headline rents in the West End should reach £125 per sq ft by the end of 2023, while Soho, Fitzrovia and Marylebone are all expected to join the £100 per sq ft rent club by 2023.
“These projections pose clear cost challenges for businesses, but with environmental, social and governance (ESG) issues taking centre stage in boardrooms, issues such as workplace wellbeing, a building’s environmental credentials and the amount of flexible space on offer in a building are rising in importance rapidly and landlords and developers need to be conscious of occupiers’ changing expectations”.
Faisal Durrani, Head of London Research
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5. The retail landscape in 2020 (and beyond) will be defined by 6 “Ps” – Perspective, Purpose, People, Place, Profitability and Pricing
Perspective: the UK retail market is not going to a stage a Lazarus-style recovery, nor is it a case of waiting for the storm to pass. At the same time, the high street most definitely has a long-term, sustainable future and it is short-sighted to write off the whole retail sector as many are doing.
Purpose: forget the rather flowery buzzword “experiential”, the keys to retail locations’ sustainability are relevance and a sense of purpose. Without these two things, retail will struggle. In many cases, this purpose must be redefined and will invariably mean different things in different locations.
People: the lifeblood of any successful retail location. Where there are bodies, there is spend potential and related retail/F&B need. Transport hubs and office-based locations in particular provide a substantial consumer demand base upon which to build a prospering retail proposition.
Place: if a town or location doesn’t benefit from a captive audience or high passing trade, it must work that much harder to become a retail destination. It must create a sense of place that makes shoppers want to visit, through a combination of aesthetics, public realm and an imaginative mix of retail/F&B/A3.
Profitability: retailers have undertaken their own “bonfire of the vanities” and are much more selective in their location planning requirements. There is a far greater pre-occupation in understanding the profitability in each and every site, coupled with that store’s role in a wider multi-channel offensive.
Pricing: capital values have rebased dramatically across all retail property market segments. Such drastic price revision will make retail increasingly good value versus other property investment classes. But effective stock selection (and understanding the other “P’s”) is a pre-requisite now more than ever.
Stephen Springham, Head of Retail Research
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6. Industrial and Logistics: Strong growth forecasts spur development activity
Strong returns have spurred a hive of development activity and we have witnessed a significant amount of new stock added to the market in 2019. Returns for logistics are forecast to continue to outperform other sectors and we expect a similar amount of new stock to come through the pipeline in 2020.
Uncertainty around Brexit has led to delayed business decisions. As the nature and timing of Brexit becomes more clear we expect this pent up occupier demand to be released into the market. With new quality stock available and coming through the pipeline, the market is well positioned to satisfy this demand and we expect to see an increase in take-up in 2020.
Vacancy rates have moved out in 2019 and with new stock coming through the pipeline, we expect overall rental growth to be more muted this year. There are bright spots however, and strong rental growth will continue in some markets, particularly where development opportunities are limited.
Structural changes in the retail market; the shift towards e-retailing and the rising consumer demand for rapid fulfilment of orders will continue to fuel strong demand for urban fulfilment centres. Small-scale logistics sites within close proximity to consumers will remain highly desirable, as part of the “last-mile” element of the delivery chain.
Claire Williams, Industrial Research
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7. Healthcare property: strong long-term outlook to drive investor appeal
In the short-term, political uncertainty and recent newspaper headlines carry the potential to influence investor sentiment, but the long-term outlook for healthcare property remains strong. As an indication of investor appetite, Q3 2019 saw a record low yield at the prime end of the care home market .
Uncertainty in other domestic and global markets will keep investors keen on the long-dated income provided by healthcare assets, and the demand-supply fundamentals are very strong with new development struggling to keep pace with an ageing population.
The healthcare sector is a multi-faceted sector, extending beyond residential care into primary care, supported living, hospitals, childcare and more. The diverse range of assets could support the performance of the sector as a whole in 2020 as a range of investor types take a closer look at alternative property.
Joe Brame, Healthcare Property Research
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