Logistics and retail returns rise as UK office sector normalises

Created: 06 Oct 2022


British commercial real estate is being buffeted by significant countervailing forces driving growth in logistics and retail whilst hampering the office and hotels sectors. Disposable incomes are being mitigated by a prolonged inflationary period, impacting both yields and returns, whilst hybrid working norms are becoming increasingly established incorporating models such as hub-and-spoke as well as satellite offices. 


Returns in the commercial property sector are set to diminish, according to a report by Capital Economics, from 10 per cent in 2022 to 3.7 per cent in 2023 then back up to 6 per cent in 2024. Key factors underpinning this compression include a 16.5 per cent drop in disposable income, inflation at approximately 12.5 per cent, as well as rising interest rates – expected to approach a three per cent base rate by 2023. 


A key driver of outperformance over the second quarter was the logistics sector, with the latest JLL data indicating an unprecedented 51.5 per cent annual increase in London rental growth. This was closely followed by other urban centres such as Leeds and Birmingham, with 20 per cent annual rental increases. Across Europe there is a shortage of vacant space available, whilst demand from online retail remains in the ascendancy. 


In the office sector, Capital Economics analysis forecasts rental growth at 1.4 per cent annually over the next five years, yielding returns of approximately 5 per cent annually over the same period. The hybrid working model is now fully entrenched, with JLL reporting companies using aspects of wellness including food to foster regenerative workspaces. 


The latest 2022 ‘Workforce Preferences Barometer’ reveals the expectation that health and being will be supported as an organisational imperative is a priority for 59 per cent of workers. Whilst the hub-and-spoke model, of centralised offices alongside satellite offices, gained traction in the immediate aftermath of the pandemic; asynchronous work has proliferated as a practice enabling flexible dynamic collaboration. 


Annual retail returns hit 17.2 per cent in Q2. This is expected to ease though, with Capital Economics predicting returns of seven to eight per cent over 2022 to 2026, which is above the commercial property average.