Declines in tenant demand easing

Nia Williams

July 20, 2009

In fact, the net balances for new enquiries and confidence were the least negative since the start of the downturn in the third quarter of 2007 says, RICS’ Commercial Property Survey published today.

The moderate pace of decline in tenant demand points towards a mild improvement in the lettings market particularly in the office sector where the net balance actually turned positive for the first time since the third quarter of 2007. In aggregate, 13 percent more Chartered Surveyors reported a fall than a rise in tenant demand compared with 40 percent in the first quarter. In the office sector, one percent more surveyors reported a rise than a fall in tenant demand up from a negative reading of 37 percent in Q1.

New enquiries to occupy business space were relatively flat although the net balances for office and industrial space turned positive for the first time since the downturn got underway. Enquiries for retail space remain depressed with the Central London market the weakest performer.

The net balance of surveyors reporting a rise in available floor space rose at a lesser pace having picked up at a record clip in the previous quarter. Rising available space continued to be reported across all regions with the exception of the London industrial market where available space was largely unchanged. 43 percent more Chartered Surveyors reported a rise than a fall in available floor space down from 65 percent in Q1.

The ongoing contraction in the economy and the continuing rise in available floor space have weighed on surveyor expectations for the rental outlook. Surveyors remain pessimistic with 53 percent of surveyors expecting a fall than rise in rents. Despite the mild improvements on the demand side, rental expectations remain bleakest in the Central London office market.

Commenting, Oliver Gilmartin, RICS senior economist said: “Whilst tenant demand in some areas improved modestly compared to Q1, the positive move was from extremely low levels. It is still unclear whether current activity reflects ongoing rationalisation of space or “fresh” tenant demand. Furthermore, the rental downturn remains in its infancy with strong levels of surveyor inducements pointing to a challenging lettings market.

“Key to the outlook for the rental market in the coming year will be the speed and duration at which jobs are being shed. Recent data offers some hope that the pace may at least be slowing in response to macroeconomic policy efforts. In the investment market, a growing distinction between prime and secondary has continued with some indications that yields on prime properties may be starting to plateau. Should the labour market stabilise during 2010 then downward pressure on capital values will start to ease.”

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