october 2020

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. 

The UK economy has been on a roller coaster this year, as the gradual re-opening of society and most sectors of the economy over the late spring/summer (albeit with many restrictions) allowed output to recover half of the ground lost during the lockdown. The recovery was always going to be more challenging from here onwards, but we are once again on a path of tightening rather than loosening COVID-19 restrictions, and output growth is now at risk of stalling or going into reverse. As was the case in the spring, the economic outlook is now very much dependent on the severity, nature and length of social distancing measures.

  • The lockdown in March 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.
  • Economic output saw a significant rebound over the summer, recovering half of the lost output. However, most sectors had re-opened by July, and so any further recovery was always going to be much more challenging.
  • GDP grew by 6.6% in July, a slowdown from the 8.7% in June, as the economy continued its steady climb from the trough in April and May. All areas of manufacturing recorded growth in July as did services and construction. However, uncertainty over the outlook is now rising again, with four concerns in particular:
    • The rapid acceleration in the number of COVID-19 cases seen during September, and the resulting shift in government policy from easing to tightening COVID-19 restrictions. The path of the virus during the winter months is a key unknown, but it appears likely that a further tightening of restrictions will be needed before the spring – either locally, nationally, or both. Sectors such as hospitality, as well as office occupancy rates would be disproportionately impacted.
    • The replacement of the Coronavirus Job Retention Scheme with the much more targeted Job Support Scheme at the end of October is likely to see unemployment rise significantly.
    • The Brexit negotiations are reaching a critical point, with the UK-imposed deadline of 15 October looming rapidly, and the potential for volatility in the financial and currency markets this autumn, and disruption to trade from the start of 2021.
    • The global picture – the US General Election in November is a key uncertainty, together with the continued rapid global rise in COVID-19 cases.
Labour market
  • The August 2020 flash estimate indicates that the number of employees on PAYE payroll was down around 695,000 compared with March 2020, with 36,000 fewer in August than July. There is a significant lag in the official unemployment data, which is only now starting to show a rise, from 3.9% to 4.1% in July, the highest rate for two years. Surprisingly, the employment rate increased slightly to 76.5%, but the trend will now be downwards.
  • Following three months of a strong slowdown in pay growth, regular pay growth (excluding bonuses) rose marginally by 0.2% pa in July, following June’s decline of  -0.2% pa. Total pay (including bonuses) continued to decline, by -1.0% pa.
  • The Coronavirus Job Retention Scheme (CJRS) is in the process of winding down and will finish at the end of October. The scale of the scheme has been enormous, with 9.6 million jobs having been furloughed at some point, with claims to date totalling more than £35 billion. Official data on the number of employments actually furloughed at any one-time lags somewhat. The latest data as at the end of June shows 6.8 million furloughed, down from 8.9 million in May.
  • The CJRS will be replaced with the much more limited Job Support Scheme, which will support employees forced to work reduced hours. Whilst it seems sensible to target ‘viable’ jobs, it will not prevent a sharp rise in unemployment. The Treasury-compiled consensus forecasts expect a rise in unemployment from 4.1% to 8.0% by the end of the year, falling to 6.5% by the end of 2021 as the market starts to recover.
  • CPI inflation fell from a pre-COVID-19 peak of 1.8% to 0.6% in May. It then increased to 1.1% as the economy reopened, with demand rising sharply for some services and the costs of providing COVID-19-secure facilities being passed on to consumers. However, August has now seen CPI fall to just 0.2%, due largely to the ‘Eat Out to Help Out’ scheme, and other downward contributions coming from air fares and clothing.
  • Inflation will probably rise modestly in the coming months. The consensus forecasts suggest CPI of 0.6% in Q4 this year, rising to 2.0% by the end of 2021.
Monetary policy and public finances
  • Interest rates were held again at 0.10% at September’s Bank of England Monetary Policy Committee meeting, with no increase to its quantitative easing support (which has totalled £300 billion since the start of the COVID-19 crisis). The minutes show that the bank does not expect inflation to return to the 2% target for another two years and thus has no intention of raising interest rates. Further quantitative easing may well be deployed in the coming months to boost spending and investment, and help increase inflation towards its 2% target.
  • 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 this year. It subsequently fell to £15 billion in July, but increased markedly again in August to £36 billion. As a result, public sector net debt has risen to 101.9% of GDP, the first time it has exceeded 100% since 1961.
  • 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. Although the Autumn Budget was postponed, targeted tax increases are highly likely once the economy is firmly in recovery phase.
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. A second phase 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 and 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, September 2020 (forecasts); ONS, Experian, Carter Jonas (last 5 years)

    • Retail sales volumes increased by 0.8% during August, the fourth consecutive month of growth, and sales are now 4.0% above February’s pre-pandemic level. Whilst this was a slowdown on the July figure, July was boosted as many retailers were still in the process of reopening.
    • There are, however, significant headwinds. The GFK consumer confidence survey remains negative at -25 in September, with concerns over job security clearly a major factor, although it has seen a steady improvement from the -34 immediately post-lockdown. The ‘Eat Out to Help Out’ scheme closed at the end of August, having provided a major boost to the hospitality sector and town centre footfall, and the recently announced restrictions on opening times for licensed premises and additional local lockdowns (which now cover more than a quarter of the UK’s population) are a further concern.
    • The recently-announced extension of the 5% rate of VAT for the hospitality and tourism sector will be welcomed, and should help to cushion the impacts of the latest COVID-19 restrictions. Worryingly, the retail and hospitality sector is now vulnerable to further potential government-imposed measures.
    • COVID-19 has significantly exacerbated the challenges already facing the physical retail sector. Online retailing’s share of the overall sector rose from less than 20% pre-lockdown to peak at 32.8% in May, although it has since gone into reverse, falling back to 26.6% by August as physical retailing opened up again. However, the underlying trend will still be firmly upwards.
    • The list of established national operators going into administration, entering into CVAs, announcing store closure programmes or becoming online-only this year has steadily risen. There is also a lengthy list of major retailers who will permanently close some outlets following the lockdown, including key anchor occupier John Lewis. Department store Debenhams has appointed administrators for the second time, and has announced further store closures and additional redundancies.
    • In addition, Intu Properties went into administration in June, although its 17 UK shopping centres remain open. Whilst most are likely to continue to operate, any closures would represent major setbacks for their respective retail locations.
    • 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, particularly if further COVID-19 restrictions are put in place during autumn/winter.
    • 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 at least the spring 2021.
    • Retail rental values had been declining for 18 months prior to the COVID-19 crisis, and this trend has accelerated. Average all-retail rental values have fallen by -7.8% over the 12 months to August 2020, according to the MSCI Monthly Index, compared with -4.4% over the previous 12 months. Although the annual rate of decline is still accelerating, the rate over three months may have peaked. Having reached -3% in June (-11.4% annualised), it has now decelerated to -2.3% (-9% on an annualised basis). As COVID-19 speeds up the process of change and adaptation that was already under way on the UK’s high streets, further rental falls appear inevitable.
    • The reversion of Government advice in England to ‘work from home if you can’ (already in place in Wales and Scotland) may stifle further 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 an 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, but 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 ceasing 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 ‘stop-gap’ accommodation until the business climate becomes more certain.
    • According to the MSCI Monthly index, average UK office rental values are now declining modestly, and were -0.3% lower in August than in April. However, average rental values are still 0.7% higher than a year ago. The latest IPF consensus forecasts (summer 2020) expect average office rental values to decline by -3.5% this year and by -1% 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 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 both 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 direct to consumers rather than the hospitality sector.
    • The crisis may accelerate the rate of change in the sector if shoppers continue to order more goods online. It is also likely that companies will re-examine their supply chains, which have become increasingly long and complex as globalisation has increased. Indeed, the commercial and political impact of the crisis could halt the spread of globalisation, at least in the short term.
    • Just-in-time manufacturing has reduced the need for storage and is reliant on these complex supply chains. 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.
    • According to MSCI, average industrial rental values are continuing to rise, although the rate of growth has decelerated. Average UK industrial rental values rose by 1.9% in the 12 months to August, down from 2.7% in the 12 months to May and a peak of 5% pa in 2018. So we are seeing 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 immune from the impacts of the sharp fall in economic output.
    • Supply shortages and structural change will combine to cushion the sector from the worst effects of the crisis, and rental performance should continue to be the least impacted of the three main commercial sectors.
    • Figures from Property Data reveal that just over £23 billion was transacted in the first eight months of 2020, 28% below the £32 billion transacted over the same period last year, and 40% below the average over the last five years.
    • Investments classed as mixed-use or in the ‘alternative’ sectors have accounted for 43% of the value of transactions so far in 2020, compared with 32% in 2019. The industrial sector’s share this year has been 14%, the same as 2019, although this has risen to 20% in recent months. Overseas investors have remained active and have accounted for 55% of the value of transactions in 2020, compared with 49% in 2019.
    • The FTSE all-share index fell by over 30% between mid-February and mid-March, although it has since recovered some ground and is now around 20% below its pre-crisis level. The financial markets will remain volatile until there is a clear path back to normality.
    • 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 0.2% as at late September. This compares with the all-property equivalent yield of 6.3% (MSCI Monthly Index, August).
    • The MSCI Monthly Index shows the all-property equivalent yield rising by 33 basis points over the six months from February to August, but the retail sector has seen a much more significant upward shift of 72 basis points. The shopping centre subsector is particularly exposed to the impacts of COVID-19 and wider shifts in the sector, and has experienced a strong upward shift of 113 basis points.
    • Equivalent yields in the office sector have shifted upwards by 24 basis points since February, with the regional market witnessing a more marked upward shift of 36 basis points. Equivalent yields in the industrial sector are only 17 basis points above their February level. Both the office and industrial sectors have seen yields level off over the last two months, and the equivalent yield for industrials actually moved marginally downwards in August.
    • All-property capital values have fallen by -6.4% from their pre-COVID-19 level in February and are -7.9% lower than a year ago (MSCI Monthly Index, August). Much of this is down to the retail sector, which has seen a fall in capital values of nearly -19% over the last year, compared with -3.7% for offices and -1.3% for industrials. The pace of decline is starting to reduce, and all-property capital value growth measured over three months bottomed out at -5.3% in May, decelerating to -1.2% in August. However, there will inevitably be further falls in values, notably in the retail sector.
    • The uncertain outlook for values is reflected in the summer IPF consensus forecasts. The average across all forecasters suggests a fall in all-property capital values of -11.7% this year (a slight improvement on the -12.4% expected in the spring forecast). However, the range of opinion is wide, from -4% to -16%. The average figure for 2021 is -1.8%, with a range from +3.5% to -5.8%.
    • There will continue to be a considerable amount of UK and overseas money looking to invest in resilient sectors such as distribution, mixed-use, ‘alternatives’, prime opportunities and long income. However, the short-term uncertainties over social distancing restrictions, economic growth and post-Brexit trade, plus 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.

    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: