Jake Webster, managing director at Seventy-Nine Group, writes that finding profitable buying opportunities in good times as well as bad is the key to successful commercial real estate investing.
A rising tide floats all boats, and this is true not just for the real estate industry, but for the economy in general.
The economic boom of the early 2000s and the subsequent bust of 2008 are a case in point: Easy financing combined with double-digit inflation in property prices allowed amateur investors with little or no experience to make profits, only for many to get hurt in the resulting global financial crisis.
An experienced real estate asset management company like Seventy Ninth Group has the expertise to find the best opportunities to purchase real estate during market declines, which has allowed us to buck the trend and maintain our profits.
Similar trends are occurring in today’s commercial real estate market, providing potentially attractive buying opportunities for those with the expertise and investment capital.
Commercial revival
The commercial real estate sector has struggled due to the post-COVID shift to working from home, soaring inflation and a cost-of-living crisis.
Property values and confidence are declining after a tough 2023. Office take-up rates across the UK at the end of 2023 are 10-15% below pre-pandemic levels, according to Savills. Market investment levels last year were the lowest in 20 years, according to CBRE.
But it's not all bad.
Anyone who understands commercial real estate and has operated through multiple economic cycles knows that underlying market conditions are only part of the picture.
Strong buying opportunities will always exist for those with the expertise, experience and trusted relationships. Moreover, 2024 is already showing bright spots for the commercial real estate sector.
Here are five reasons why now may be a good time to invest.
1. Opportunities for growth
The sector is expected to grow in 2024 after a tough 2023, creating an opportunity to buy at the bottom of the market.
According to Savills, £8 billion was invested in commercial property in the first three months of the year, representing a forecast annual increase of 12%.
CBRE also predicts that investment in the office market will increase in 2024 as interest rates fall later this year as inflation returns to target.
2. Return to the office
The past year has seen a series of high-profile instances of major companies urging staff to return to the office, from government pressure on civil servants to Britain's biggest banks.
These are not isolated cases: according to Towergate Health & Protection, companies want their employees to return to the office, and 98% of companies are actively encouraging employees to do so with perks like free meals and access to gym facilities.
More than a third (37%) now have mandatory attendance days.
3. Reversing the Space Race
The return to the office is helping to reverse the “war for space” in the housing market, as more people worked remotely during the pandemic, boosting demand for larger homes in the suburbs.
But that has changed as workers return to the office.
Halifax said apartment prices rose more quickly than larger homes last year (2.7 per cent compared to 1.7 per cent) as workers returned to city life and first-time home buyers reacted to limited affordability.
The reversal in the “race for space” dates back to May 2022, when Rightmove noted growing demand for city centre living as people prioritised locations closer to their offices.
4. Flight to quality
Despite challenging market conditions, demand for quality office space in prime locations remains high.
CBRE said companies are looking for the highest quality, best locations and most environmentally sustainable buildings to attract employees back to the office.
Demand is outstripping supply in this subsector, a trend that is expected to continue beyond this year.
Knight Frank research backs this up, noting that around 84% of office take-up in the South East last year was new or Grade A space, with occupiers looking for quality over size.
Seventy Ninth Group has recognised the demand for such prime office properties and has adjusted its strategy accordingly.
Millennium Park in Warrington is a fantastic example of how perfectly located office space has been transformed to meet the needs of modern small businesses and their employees, from electricity chargers to meeting facilities and outdoor space.
5. Skyrocketing rents
CBRE said rental growth remains strong, with the office space market set to record rents in 2023. The firm forecasts a further 3% growth in premium property across the UK office market this year.
He also noted that due to the imbalance between supply and demand, buildings with the best locations and proper facilities will command the highest rents.
The data highlights the recovery of the UK office sector after a difficult few years.
Of course, things remain tough, but the market is far from dead and represents an investment opportunity for those with deep insight into the office space sector.
The latest RICS UK Commercial Property Monitor said the market has “reached the bottom of the current cycle” and noted improving sentiment in the London office market in particular, with the North set to follow suit.
Plenty of buying opportunities
The commercial sector is showing signs of recovery, with experts predicting growth to accelerate from 2025, so now could be a great time to explore opportunities in this sector.
But succeeding in this field requires more than simply timing the market — it's important to know a good opportunity when you see one, whether economic times are good or tough.
No two real estate projects are the same, so asset management businesses that are agile and willing to adapt their approach will be in a position to take advantage of good buying opportunities.
A good strategy is a bespoke approach, structuring every commercial project separately using the most appropriate business model, from acquiring, renovating and selling commercial office assets to managing and leasing.
This means adding value for our partners and investors, regardless of current market conditions.