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Where are the opportunities in a polarising commercial property market?

The commercial property market has been a rare bright spot in an otherwise largely gloomy six months, but the market is becoming increasingly polarised, with segment divergence a key feature. The big question is, what should investors target?

Divergence clearest in the re-emerging office space segment

As we move into the second half of the year, perhaps the clearest example of commercial property market polarisation is the development of the office space segment. Battered by the impact of the pandemic, the recent largely unexpected upturn in this area has been a fillip for the market, but this return is proving notably uneven.

Demand for office space is rising again, particularly in major cities, but this uptick is being seen predominantly in connection with high-end properties, a category that is linked closely to sustainability credentials as well as the ability to meet expectations related to staff wellbeing and de-densification.

Sustainability key factor in renewed office space growth

Carbon reduction targets are becoming increasingly important key performance indicators for firms and they are willing to invest in office space that has a strong sustainability profile in order to help meet targets. On the flip side, demand for older office space remains laboured, not least because of the costs involved in operating such sites, including in relation to meeting increasingly stringent environmental regulations.

A similar trend is visible in the retail space, in particular shopping centres, with newer properties offering better returns and attracting more investment. Conversely, older properties are generally offering much smaller potential.

Quick commerce one to watch in vibrant warehousing space

Polarisation is not as visible elsewhere, in particular in the powerhouse warehousing and logistics space, which looks set to continue to perform well throughout the second half of the year as vacant space remains at a record low and long-term trends fuelling growth, such as e-commerce, remain securely in place.

A development gathering pace in this segment is the growth of quick commerce and hyper localisation and the resultant demand for urban small warehousing and logistics space. Notable increases in rents for small industrial units in the capital is indicative of the expansion of this market and signals an opportunity for investors.

Market uncertainty underlines role of commercial loan lender

For all the growing optimism surrounding the commercial property market, any forecasts come with some significant caveats, most notably in relation to the impact of the war in Ukraine and Brexit policy. Both are harming the marketplace and will continue to do so for as long as they go on.

As such, much uncertainty hangs over the market and this is evident in the trends that we are seeing – in the rising demand for secure, higher-end assets and the general flight to quality.

Looking ahead, this movement is only set to gain more impetus, with warnings of recession growing more numerous. In such circumstances, it is important that investors make sure they have the right commercial loan and mortgage lender.

To find out more about A&T Business Associates services for commercial property investors, contact Tony Hedger on 01903 602211 or tony.hedger@atbusinessassociates.co.uk.

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