Demand for commercial property drops by one third

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by Lin Freestone

According to the latest survey by the Royal Institute of Chartered Surveyors (RICS), for the second quarter of the year tenant demand for retail, industrial and office space overall has dropped by more than a third between January and June 2008.

The retail sector continues to be the most severely affected, with 64% of the surveyors questioned in the RICS survey stating there has been a reduction in demand. The continuing credit turmoil and a slowing housing market are deterring retailers from investing in property.

The chief economist at RICS said that the drop in tenant demand is indicative of the increasing pressure on business, while the wider economic impact is starting to be felt in the drop in consumer confidence.

He said that rental growth is on a downward spiral and evidence suggests that the levels of inducements are on the increase as landlords attempt to keep property occupied. The picture is looking depressed in the near term but investors are seeing yields begin to reach levels which will offer decent returns.

Occupiers are beginning to re-evaluate their demand for commercial property space. More than half (54%) of the surveyors questioned reported a fall in new office enquiries. The report said that surveyors continue to be pessimistic, and that confidence in activity and rental expectations have fallen across all sectors to the lowest levels on record.

The RICS survey showed that available office space in Central London has risen at the fastest pace in the survey’s history to a record high. Fifty per cent more surveyors reported a rise rather than a fall in available office space in Central London compared to 4% in the first quarter of the year.