Avison Young launches 2021 National Outlook for UK commercial real estate
Changing consumer demands, investors’ desire to mitigate risk, pandemic fallout and Brexit uncertainty will impact activity in office, retail, residential, and industrial sectors.
Strategic real estate advisor Avison Young today released its UK National Outlook for 2021, with predictions for the commercial real estate industry spanning office, retail, residential and industrial sectors. This follows last week’s launch of Avison Young’s Ten Trends projected to impact commercial real estate globally.
Daryl Perry, Head of UK Research at Avison Young, said: “We have just witnessed the largest economic hit the UK has ever seen, and the landscape is unrecognisable from a year ago. How the commercial real estate industry, and indeed the wider economy, is impacted in 2021 largely depends on when the pandemic can be brought under control, with Brexit another potential cause of disruption.
“While the accelerated structural shifts in our real estate markets provide opportunities to implement change that will ultimately benefit our economies, communities and the environment, they currently also add a high level of ambiguity for investors and occupiers.”
Stephen Cowperthwaite, principal and managing director of Avison Young’s Liverpool office, said: “2020 has taught us that making predictions is fraught with difficulty. Yet, look beyond the pandemic and what you see is that COVID-19 has accelerated many structural changes that were already taking place across the built environment. How we live, work and play has changed and that is reflected in the key trends across retail, offices, industrial and housing.
“Prior to COVID-19, Liverpool City Region’s growth rate was higher than national levels. Liverpool has been hit hard but it has also been resilient. Identifying the key issues that will play a big part on the road to recovery is now vitally important. Liverpool has a strong retail core, with Liverpool One at the forefront of experiential shopping.
“The limited availabilty of Grade A office space remains a challenge, but also an opportunity. The region has real strengths, particularly in health, life sciences and digital, as well as the more traditional maritime and professional services. Aligning these to an unrivalled cultural offer, provides the potential to create new, attractive workplaces that are fit for 2021 and beyond.
“The pandemic has seen a real shift, with much greater importance being placed upon environmental and social value. These are trends that are thankfully here to stay, and it is so important that these feature front and centre in the plans for recovery.”
The changing attitude towards the role of workplaces will impact activity in the office sector in the coming year. In the short-term, occupier requirements are being re-evaluated as businesses look to mitigate costs and respond to a rise in homeworking. However, those who are able to take a longer-term view on the growth of their business are already looking at ‘futureproofing’ requirements. This will result in an emergence of a two-tier market with activity focussed on the larger end of the market, particularly through pre-letting. The office will remain a key space for collaboration, innovation, relationship building and mentorship, sustaining a level of demand in key regional markets and London throughout 2021. The new year will likely also bring examples of the emerging flexible ‘work near home’ concept, with several operators actively looking for space in commuter and suburban towns.
While the UK has long been one of the leading proponents of online retail, the past months unsurprisingly saw a giant leap forward for online sales, with the peak of the crisis seeing online retail increasing to 34% of total sales in May. New lockdown measures and a likely permanent shift in consumer habits will underpin the strength of online in the long term. Over the short-term, a number of out of town destinations and some local high streets have been relative beneficiaries, as people have spent time closer to home, benefiting the local economy. However, an increase in the number of business failures within the sector will become increasingly likely as sustained government support and the moratorium on evictions come to an end during 2021. This will undoubtedly lead to a rise in vacant space across the UK’s retail sectors and physical stores will have to evolve to stay relevant, with an increase in showroom concepts, a focus on experiential retail and click-and-collect.
2020 will likely be a record year for Big Box take-up across the UK. Amazon has been the most notable active acquirer of space, but a number of supermarkets have also doubled their online platforms and high street retailers have been increasing their online presence. Continued demand underpins values and puts further constraints on land supply, particularly in London and the South East. Reshoring, Dark Kitchens and Vertical Farming, as well as last mile delivery and urban logistics will also be key areas to watch in 2021. While the industrial market has so far shown significant strength, tapering of fiscal support, rising unemployment and continued containment measures will weigh on consumers’ ability and willingness to spend in 2021, potentially negatively impacting the sector.
The rise in homeworking and a focus on health and wellbeing have already led to a sharp increase in minor planning applications to extend living space and a vast number of owners have been upsizing or moving to more rural locations. This may reduce some of the upward pressure on house prices in major cities. Further, the search for strategic land is likely to intensify, as consumer demand is borne out through planning and design. The heightened awareness around the effects of poor housing and lack of accessible outdoor spaces in many urban areas will be reflected in 2021, particularly in urban design, as city planners and designers adapt to reinvent cities in the wake of the pandemic. Covid-19 will also accelerate the uptake of modern methods of construction, which provide energy efficient, faster and safer alternatives that will appeal to the institutions and other large-scale investors who are increasingly building and owning housing in the UK.
Commercial real estate investment
Economic uncertainty, structural shifts in occupier markets and restrictions on mobility continue to weigh the market down. Debt, whilst cheap, is increasingly difficult as lenders look for increased assurances to mitigate risk. Despite this, a wall of money looking for a yield and the certainty of interests remaining low for the foreseeable future is helping underpin demand, particularly for core stock in the majority of our key markets. Overall, industrial looks set to be the best performer 2021. Big Box space and smaller lot sizes focussed around supply chains and e-commerce will continue to attract significant demand, along with data centres. The residential sector is also likely to benefit, providing a strong track record of rental value growth and less volatility than commercial property. In line with wider trends, an increase in the suburban Build to Rent Sector, affordable housing, Later Living and healthcare assets is to be expected.