Our Commercial Market Outlook, published by our research team, is continually being reviewed and updated with our latest insights. If you would like to find out about how the current market changes will impact on your property needs, please contact us. 

  • By October 2020, UK economic output had recovered about two thirds of the ground lost during the first lockdown. However, with the increased social distancing restrictions and lockdowns since the autumn, this recovery has gone into reverse. This is starting to feed through to the output figures, with a decline of -2.6% in November. The overall impact of the current lockdown will be significant, although not as severe as that experienced last spring, as more sectors of the economy remain open for business. The commencement of the COVID-19 vaccination programme means a greatly improved outlook from Q2, but the current lockdown is likely to remain largely in place until at least March.
  • The agreement of the trade deal with the EU removes a key area of uncertainty and guarantees zero tariff and zero quota trade on goods that were worth £668bn in 2019. However, it will still result in significant costs and delays to businesses as cross-border traders face increased paperwork, and the new processes will take time to become established. The service sector is largely absent from the agreement, and in the important financial services sector, “equivalence” (which would enable continued access to EU markets) has only a very limited agreement in place so far. 

  • The first lockdown in March 2020 precipitated an unprecedented fall in output of nearly 26% over a two-month period. To put this into context, output fell by just under 7% over a 12-month period during the global financial crisis in 2008/09.
  • There was a significant rebound during summer 2020 as most sectors of the economy re-opened, and by July output was ‘only’ 11.4% below its pre-crisis peak. Since then, recovery has slowed, with monthly growth rates decelerating from 9.1% in June and 6.3% in July, to 1.0% in September and just 0.4% in October, taking output to 8.2% below its pre-crisis peak.
  • The second and current third lockdowns in England and the increasingly high level of restrictions across the UK saw this progress go into reverse, with a fall in output of     -2.6% in November. Consumer sectors such as retail and hospitality have been, and will continue to be disproportionately impacted, and office occupancy rates will have declined again. In addition, the second round of school closures will have a detrimental effect on employee productivity.
  • Therefore, UK output is likely to record a fall in Q4 2020, with meaningful recovery delayed until Q2 this year, resulting in a double dip recession. However, the fact that businesses have already adapted to working in a COVID-19-secure way and to home working should reduce the contraction. The latest Treasury-compiled consensus forecast suggests a fall of -2.1% in Q4.
  • Once recovery is under way, the bounce-back could be quite sharp, with confidence boosted by the vaccine programme and the EU trade deal, and the potential for a significant release of pent-up household savings. It is important that government support measures for firms continue for long enough to ensure that fundamentally sound business survive until consumer demand has returned.
Labour market
  • There is a significant lag in the official unemployment data, which is now showing a marked rise, from 3.9% pre-COVID-19 to 4.9% in the three months to October 2020. Single-month estimates suggest a rise to 5.2% in October, up from 4.9% in September.
  • There were 370,000 redundancies in the three months to October, compared with 153,000 over the previous three months. This was probably exacerbated by employers not expecting an extension to the furlough scheme, and it took total redundancies since February to 630,000. Early estimates indicate that the number of payrolled employees fell by 819,000 from February to November 2020.
  • Following a sharp slowdown in pay growth over the summer, regular pay growth (excluding bonuses) has picked up considerably, rising by 2.8% in the three months to October compared with the same period a year ago, well ahead of inflation. Total pay (including bonuses) rose by a similar 2.7%.
  • The Coronavirus Job Retention Scheme (CJRS) was due to have been replaced by the much more limited Job Support Scheme (JSS) from November 2020, but it has now been extended until the end of April 2021.
  • The scale of the CJRS has been enormous, with 9.6 million jobs having been furloughed at some point, and claims (to mid-October) totalling more than £41 billion. 2.4 million people were furloughed at the end of October, down from 3.3 million in August, and a peak of 8.9 million in May.
  • The extended CJRS will not prevent a continued rise in unemployment. The Treasury-compiled consensus forecasts expect a rise in unemployment from the current 4.9% (three months to October) to 5.9% by the end of 2020, remaining high at 6.7% by the end of 2021 – although these figures are lower than feared earlier in the COVID-19 crisis.
  • Weak consumer demand and spare capacity in the economy mean that inflation is currently very low. The annual CPI rate peaked at 1.8% in January 2020, and has been rather volatile over the last year, although within a range of 0.2% to 1.0% since April, well below the Bank of England’s target rate of 2%. The latest figure (December) is 0.6%, up from to 0.3% in November, with higher transport and clothing costs contributing to the increase.
  • Inflation will almost certainly rise in 2021 as the economy recovers, with the Treasury Consensus for CPI currently suggesting 2.0% by Q4. Whilst inflation is not a key concern, there are risks that it could exceed the current forecasts, with the possibility of higher prices for some goods despite the agreement of the trade deal with the EU, and a risk that the supply side of the economy may not recover as quickly as demand.
Monetary policy and public finances
  • The Bank of England’s Monetary Policy Committee again held interest rates at 0.10% at its December meeting. It did not further extend its programme of quantitative easing, following November’s purchase of an additional £150 billion of government bonds, which took its total stock of bond purchases to £875 billion.
  • Falling tax receipts and the massive government support packages have combined to increase monthly government borrowing, which had fallen sharply in recent years to an average of under £4 billion per month in 2019. This figure rose sharply in the wake of COVID-19 to nearly £50 billion per month by April 2020. It has since moderated, but remains historically high at over £20 billion per month. As a result, public sector net debt has risen rapidly to 101% of GDP, the highest ratio since the early 1960s. With the second and third lockdown in England and extension of measures such as the CJRS, it will increase further.
  • The Government has indicated that it will not follow the “austerity” policies adopted after the financial crisis and will be focusing on investment, particularly housing and infrastructure. Public sector debt is therefore likely to remain high into the medium term, although it should be manageable at this level given the ongoing low interest rate environment. Targeted tax increases are highly likely once the economy is firmly in recovery phase. The Budget on 3 March is therefore unlikely to announce immediate tax rises, but will be closely watched.
Longer-term trends
  • The potential scale of longer-term structural change is becoming ever more apparent, with the pre-existing trends towards more home working and online shopping accelerating rapidly. This will have significant long-term impacts on the quantity, nature and location of commercial property requirements. The more recent phases of tightening COVID-19 restrictions will entrench this further.
  • Changes to the planning system in England will also impact the property market. The Government has introduced legislation to permit greater change of use of commercial property without the need for planning consent, and adding space above existing buildings is also being given a fast-track approval process. This should allow commercial uses to shift more easily as demand evolves and the differentiation between uses becomes ever more blurred.
  • Furthermore, the Government’s White Paper “Planning for the Future” was published in August. This sets out a proposed package of wide-ranging, fundamental reforms, set against the backdrop of the pledge to “build, build, build” and to “level up” the stark variations in prosperity between different parts of the country. Development will play an important role in the economic recovery, help to ensure that the built environment reflects the longer-term shifts in the type of property that will be required post-COVID-19, and assist with the Government’s “levelling-up” agenda.
Summary of key economic forecasts




Average, last 5 years (2015-2019)

GDP growth



1.8% pa

CPI inflation



1.5% pa

Unemployment rate (LFS)




Employment growth



1.2% pa

Private consumption



2.3% pa

House prices



4.4% pa

Source: HM Treasury compilation of independent forecasts, December 2020 (forecasts); ONS, Experian, Carter Jonas (last 5 years)

    • The shifting and unpredictable nature of social distancing restrictions has continued to hamper the physical retail sector, and the third lockdown in England is clearly a further major setback, especially following the closures of non-essential retail and hospitality in many areas of the country over the festive period. This is set against a backdrop of other significant headwinds including a further rise in unemployment, constrained wage growth, low consumer confidence and the continued long-term shift online.
    • The Centre for Retail Research (CRR) has reported that 2020 was the worst year for high street retail job losses in more than a quarter of a century, with nearly 180,000 jobs lost. It expects a further 200,000 additional job losses in the coming months.
    • The GfK consumer confidence survey improved 6 points in December, boosted by the commencement of the COVID-19 vaccine programme, but remains very weak at -26, with concerns over job security clearly a major factor. The Chancellor recently announced an additional £4.6bn lockdown fund to help businesses through the third English lockdown. This is in addition to the reduced 5% rate of VAT for the hospitality and tourism and the extended CJRS which should help to cushion some of the impacts of the latest COVID-19 restrictions until they expire in March 2021. That said, the hospitality sector faces extreme challenges moving forwards.
    • Online retailing’s share of the overall sector rose from less than 20% pre-lockdown to peak at 32.9% in May. This figure had fallen to 26.2% by September, but with the second national lockdown, it rose again to a record 36% in November. The underlying trend will remain firmly upwards. The third lockdown will only continue to reinforce and increase the requirement of online shopping.
    • The list of established national operators going into administration, entering into CVAs, announcing store closure programmes or becoming online-only has steadily risen. The announcements in 2020 of Arcadia and Debenhams have added to the lengthy list of major retailers who are at risk of permanent closure following the lockdown.
    • With the retrenchment of many national retailers in recent years, high street letting activity had become increasingly focused on local independent operators, favouring some secondary pitches with more affordable rental levels.
    • A key question remains around the survival rate of these independent outlets that do not have access to the same resources or management experience as the national operators. However, many independent outlets appeared to be weathering the storm well so far, and indeed some have been seizing the opportunity to occupy previously unattainable units. Some sectors are particularly active, including food and convenience stores, pet shops, DIY stores and other home-related stores such as furniture.
    • Prior to COVID-19, a number of cities were implementing or considering reducing car access to help combat the adverse health implications of exhaust emissions. More centres are now going car free or reducing car access in order to create more space for social distancing. This is helping to create a better shopping environment.
    • Footfall in many suburban areas is holding up well, with more consumers looking to shop locally. Out of town, we are also seeing good demand for drive-thru food & beverage outlets.
    • Locations with a high tourist footfall have tended to be relatively successful in recent years. These centres are likely to face a lengthy period where overseas tourism is significantly reduced, and some hospitality venues may not reopen in these dependent areas until Q2 2021 at the earliest.
    • Retail rental values had been declining for 18 months prior to the COVID-19 crisis, and this trend then accelerated sharply. Average all-retail rental values fell by -8.7% during 2020, according to the MSCI Monthly Index, compared with -4.5% during 2019. The rate of decline has slowed a little since its peak over the summer. The fall in rents measured over three months peaked at 3% in June 2020, but has been within a range of 2.1-2.4% since August.
    • The second and third lockdowns in England will have reversed previous tentative steps back to the office, and will prolong uncertainty over the extent to which underlying demand for office space is reducing.
    • Many high-profile corporates have announced redundancy programmes and an increasing number of businesses are downsizing their real estate footprint to reflect this and to minimise exposure to real estate costs in the face of uncertainty over how much space will be required going forward. By the same token, fewer occupiers are proceeding with their office relocation plans. We have seen a significant reduction in letting activity across many key commercial centres, although some sectors are proving highly resilient, including life sciences and R&D space.
    • Office vacancy will rise, especially in the second-hand market as schemes under construction complete, some businesses cease trading, flexible space operators reduce capacity, and more businesses choose to exercise break options or fail to renew at lease end. Tenants with lease expiries may decide to defer office moves and seek short-term lease extensions until economic conditions become more certain.
    • The flexible space market (or serviced office sector) has expanded rapidly in recent years, underpinning demand in the broader office market. The COVID-19 crisis will be a major test for the sector, with its income levels clearly at risk as tenants fail to renew leases. However, we are currently seeing a short-term uptick in demand from tenants with imminent lease expires and break options seeking to downsize and requiring ‘stopgap’ accommodation until the business climate becomes more certain.
    • According to the MSCI Monthly Index, average UK office rental values peaked in April 2020 and fell by -0.8% over the subsequent six months. However, rental values were broadly stable during the last quarter of 2020. The impact is not being shared equally across the UK, however. Since April, rental values have fallen by -1.5% in London’s Midtown & West End, by -1.0% in the City of London and by -0.9% in the rest of the South East. In contrast, office rental values have been virtually unchanged in the rest of the UK outside of London and the South East (+0.1%).
    • The latest IPF consensus forecasts (November 2020) expect average office rental values to decline by -2.5% in 2021, although there is clearly huge uncertainty. We expect a continued widening in rent free incentives, a move to shorter leases and the inclusion of more regular tenant-only break options, as demand for greater lease flexibility increases.
    • Whilst office demand remained relatively strong prior to the COVID-19 crisis, the supply of quality space has been highly constrained. Construction activity has been subdued ever since the financial crisis, and has been on a downward trend over the last two years. As a result, there is a shortage of grade A supply relative to robust demand in many markets. This will help to cushion rental falls at the prime end, although an increasing quantity of grade A space could come back to the market as companies rationalise their occupational portfolios.
    • Industrial take-up has been buoyant in recent years as retailers and their third-party logistics partners adapt to growing online demand. The convergence of traditional supply chains continues to fuel demand for large distribution warehouses and smaller urban units for last-mile delivery. The grocery sector has seen robust demand and has been adapting its supply chains, for example to cater for increased selling directly to consumers rather than to the hospitality sector.
    • In the initial lockdown, many enquiries were for short-term COVID-19 requirements, for example PPE equipment, medical supplies and supermarket requirements to cater for the sudden switch in consumer demand. Given the uncertainty, many landlords were happy to accept short-term leases in the hope that they would be extended, or as a stopgap until conditions improved. We are now seeing a switch to more strategic longer-term lettings related to the rise in online retail.
    • With the combination of continued structural change towards greater internet retailing and short-term COVID-19 requirements, transaction levels have held up relatively well. Distribution warehouse take-up in 2020 has been dominated by Amazon, who took a colossal 2.3 million sq ft pre-let at Tritax’s Littlebrook scheme near Dartford, and a similar-sized unit at Panattoni’s Symmetry Park near Swindon. The online retailer also took a pre-let of nearly 2 million sq ft at Gateway 45 in Leeds’ Aire Valley Enterprise Zone, and over 700,000 sq ft at Doncaster iPort, plus other units of 500,000+ sq ft.
    • Although demand is being driven by online retailers, including retail chains switching from in-store to online (and closing stores) and parcels carriers, there is a much broader spectrum of firms looking for space. This ranges from manufacturers and engineering firms to medical suppliers. There is also very strong demand for data centre space, driven by increasing data storage requirements associated with home working.
    • Just-in-time manufacturing has reduced the need for storage and is reliant on these complex supply chains. However, global supply chains have become increasingly long and complex, and it is likely that companies will now re-examine these. The lack of resilience in the manufacturing sector is likely to add to the argument for “reshoring”, leading to increased demand for storage space in the UK.
    • There remains a severe shortage of well-located sites for distribution use, and also urban sites suitable for last mile delivery, waste recycling and open storage. Overall, it has been hugely challenging to satisfy occupier demand, creating strong upward pressure on values, although rental growth is now slowing.
    • We are likely to see an increasing number of larger transactions, with deals over a million sq ft becoming more commonplace. This is putting greater pressure on site availability, with limited sites of sufficient size coming forward. Eaves heights are also increasing in line with a greater use of automation and robotics.
    • According to MSCI, average industrial rental values are continuing to rise, although the rate of growth has slowed. Average UK industrial rental values rose by 2.3% during 2020, down from 3.2% pa in 2019, and a peak of 5% pa in 2018. We are witnessing a continuation of the slowdown in rental growth from unsustainably high levels, rather than as a direct result of the COVID-19 crisis, although the sector is not entirely immune from the impacts of the sharp fall in economic output. A further slowdown in rental growth seems likely this year, a view reflected in the latest IPF Consensus forecasts, which point to 1.0% growth in 2021.
    • Supply shortages and structural change will combine to cushion the sector from the worst effects of the COVID-19 crisis, and rental performance should continue to be the least impacted of the three main commercial sectors. Prime industrial rental levels are generally holding firm, with a minimal impact on incentives. Indeed, we are seeing selected rental increases where there is a lack of stock.
    • Activity and investment volumes in 2020 have shown considerable resilience given the context of the year, particularly as capital fund raising has been challenging with many investors continuing to delay decisions.
    • Q4 2020 saw a total of £10.4 billion transacted across the UK commercial investment market, up by two thirds on Q3, when £6.3 billion changed hands. This takes investment for the whole of 2020 to £33.7 billion. Despite this bounce back, the Q4 and full-year figures remain below 2019, which saw £15.8 billion invested in Q4 and £45 billion across the year. Q4 2020 was down by 12% compared with the five-year quarterly average.
    • Across the whole of 2020, the industrial sector has understandably been the most resilient, with investment falling by just 4% on 2019. This compares against a 69% fall in the hotel and leisure sector, a 31% reduction in office investment and an 11% fall in the retail sector.
    • Overseas interest has remained strong, particularly from European and Far Eastern buyers, and accounted for 57% of the total investment value in Q4 2020 (and a similar 58% over the whole year).
    • The all-property equivalent yield moved upwards by 33 basis points over the six months between February and August 2020, peaking at 6.31%. It has since seen a modest downward shift to 6.21% in December, driven by the industrial sector.
    • Since February 2020, the retail sector has seen a much more significant upward shift than all property of 76 basis points, and equivalent yields in the office sector are now 28 basis points higher than in February. In contrast, the industrial sector has seen a modest downward movement in average equivalent yields since the summer, taking them back to their pre-COVID-19 level.
    • 10-year gilt yields have been on a long-term downward path, as the global economy has shifted to a lower interest rate environment. With investors flocking to safe assets and emergency interest rate cuts, the 10-year gilt yield has now fallen to just 0.3% as at mid-January. This compares with the all-property equivalent yield of 6.21% (MSCI Monthly Index, December).
    • All-property capital values have been falling consistently for the last two years, driven by the readjustment of the retail sector. This decline accelerated during the first few months of the COVID-19 crisis, with values falling by -3.6% between March and June 2020 (MSCI Monthly Index). Values in all three main sectors fell, with retail the most affected (-6.7%) and industrial the least (-1.7%). Office capital values fell by -2.6%.
    • Since June 2020, capital values have been virtually flat, falling modestly to November and seeing a modest uptick during December (of +0.5%). The sectors have seen starkly differing performance over the six months to December. Industrial capital values have rebounded strongly, rising by 6.3%, whilst the decline in retail capital values was -5%. Offices sat between the other two sectors at -2%.
    • The uncertain outlook for values is reflected in the November 2020 IPF consensus forecasts. The average across all forecasters suggests a fall in all-property capital values of -3.2% in 2021. However, the range of opinion is extremely wide, from +2.9% to -10.8%, reflecting the high level of uncertainty.
    • The all-property annual total return stood at -1.0% in December 2020, according to the MSCI Monthly Index, with industrial property seeing a robust return of 8.7%. In contrast, retail recorded -10.8%, with offices returning -0.9%.
    • The short-term uncertainties over social distancing restrictions, economic growth and the evolving changes to long-term demand, will impact investor demand in sectors such as retail and offices, although prime investments will be somewhat more insulated. However, there will continue to be a considerable amount of UK and overseas money looking to invest in resilient sectors such as distribution, mixed-use, the ‘alternative’ sectors, and long income.

    For further information on the current market, or to speak directly to one of our commercial property professionals, please contact us.

    @ Scott Harkness
    Scott Harkness
    Partner - Head of Commercial Division
    02039 938757 email me about Scott
    @ Daniel Francis
    Daniel Francis
    Head of Research
    020 7518 3301 email me about Daniel

    Scott specialises in providing advice on agency and development matters to a wide variety of clients from private individuals and trusts through to property funds, institutions, companies and statutory authorities.  He advises both owners and occupiers across public and private sectors.

    Working at Board level with clients, Scott’s specialist areas include Business development, development of property strategies, property investment advice, advice in the marketing and disposal of property as well as property acquisitions.

    Scott has a particular knowledge and understanding of the property market in the wider Oxfordshire region whilst also operating on a national basis on specific projects.

    I can provide advice on:
    Daniel Francis has been Head of Research at Carter Jonas since 2018. He is responsible for delivering the firm’s programme of market and topic-based research, providing clients with the insight they need. Daniel’s main focus is the commercial market, and he works closely with his rural and residential research colleagues. 

    Daniel is a member of the Investment Property Forum and the Society of Property Researchers.
    I can provide advice on: