JUNE 2021

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. 

  • Following a sharp fall in output during January due to the imposition of the third national lockdown, the UK economy grew by 0.4% in February and 2.1% in March. The March figure was the fastest monthly growth since August 2020, with service sector output increasing by 1.9%, the production sector rising by 1.8%, and construction output growing by 5.8%. Overall, UK GDP fell by -1.5% during the first quarter of the year, although output in the construction sector increased over the quarter as a whole.
  • With the roadmap out of lockdown now underway and the COVID-19 vaccination programme continuing to prove very efficient (more than 70% of UK adults have now received at least one dose), the economy appears to be entering a period of sustained economic growth. The end of Brexit uncertainty at the start of the year has also helped, and the opening of non-essential retail in April and indoor hospitality from 17 May has added significant momentum.
  • Confidence surveys are reflecting the improved outlook as many sectors of the economy return to a more normal operating environment. The UK Manufacturing PMI rose to 60.9 in April, up from 58.9 in March, signalling the steepest pace of expansion in this sector since records began in 1994 (a reading over 50 indicates expansion). Growth in output and new orders was among the steepest in seven years while job creation continued at one of its highest levels ever.
  • The UK Construction PMI held steady at 61.6 in April, little changed from March’s six-and-a-half year high of 61.7, showing a continued strong rate of expansion. All sub-sectors of commercial, residential and civil engineering are growing rapidly, and job creation was the highest in over five years. However, suppliers’ delivery times remain challenging to the industry, being the third-longest since 1997. Supply-chain delays and shortages could constrain growth, and are contributing to a rise in the cost of many raw materials.
  • The reopening of the hospitality and retail sectors during April has boosted the services sector PMI to 61.0, up from 56.3 in March, marking its strongest rate of expansion since October 2013. Expansion was driven by both consumer and business spending although consumer services clearly outstripped business services as customer-facing parts of the economy reopened. New business volumes rose at the highest rate in over six years while job growth continues to accelerate at its fastest pace in over five years.
  • The Treasury-compiled consensus forecast projects a rise in GDP of 6.5% for this year as a whole, a marked upward revision from the 5.7% projected in April. Growth in 2022 is forecast at 5.6%. These are strong rates of growth compared with less than 2% pa pre-COVID-19, as the economy recovers from the -9.8% drop in output in 2020.
  • Clearly, there is considerable uncertainty around the pace of recovery – the faster than anticipated vaccine rollout may accelerate the pace, whilst any emergence of a new COVID-19 variant able to evade the current vaccines would be a major setback. A key test will be the withdrawal of government support measures during the second half of this year, coupled with the need to repay pandemic loans and missed rental payments. It is important that government support measures for firms continue for long enough to ensure that fundamentally sound businesses survive until consumer demand has fully returned. 

  • The official unemployment rate is currently 4.8% (three months to March), compared with 3.9% pre-COVID-19. However, this latest figure represents a decrease from 4.9% in the three months to February and a peak of 5.1% in the three months to December 2020.
  • The number of payrolled employees increased for the fifth consecutive month in March, although remains 772,000 below pre-COVID-19 levels. Since February 2020, the largest falls in payrolled employment have been in the hospitality sector, among those aged under 25 years, and those living in London.
  • The Coronavirus Job Retention Scheme (CJRS) will now run until the end of September this year. Its scale has been enormous, with 11.4 million jobs having been furloughed at some point, and claims (to mid-March) totalling more than £57.7 billion. The number of employments furloughed rose from 4.0 million at the end of December to 4.9 million in January 2021 as the third national lockdown impacted the economy. Provisional figures show a fall to 4.2 million by the end of March.
  • The CJRS appears to have been highly successful so far in maintaining employment, and unemployment is far lower than seemed possible at the start of the pandemic. However, a further modest rise in unemployment is probable as government support measures are removed. The Treasury-compiled consensus forecasts expect a rise in the unemployment rate to 6.2% by the end of this year, reducing to 5.4% by the end of 2022. However, given current labour shortages being reported in many sectors, these projections may prove to be overly pessimistic.
  • Following a sharp slowdown in pay growth over the summer, regular pay growth (excluding bonuses) has picked up considerably, rising by 4.0% in the three months to March. Total pay (including bonuses) rose by a slightly higher 4.6%. However, these figures, well above general inflation, are being artificially inflated due to a disproportionate fall in the number of lower-paid jobs compared with pre-pandemic. The underlying rate of wage growth is estimated by the ONS at 2.5%. 

  • Weak consumer demand and spare capacity in the economy have kept inflation low during the COVID-19 crisis. The annual CPI rate peaked at 1.8% in January 2020, and has been rather volatile over the last year, but within a range of 0.2% to 1.0% between April 2020 and March this year, well below the Bank of England’s target rate of 2.0%.
  • However, the latest figure for April 2021 shows an uptick to 1.5% from 0.7% in March. The largest upward contribution to this month’s inflation came from housing and household services, mainly in the form of utility prices as April saw an overall increase in gas and electricity costs. Transport was another contributor as fuel prices rose 13.6% between April 2020 and April 2021.
  • Inflation is likely to continue at a higher rate than over the last year, as the economy recovers, although with some continued volatility. Many employers are currently reporting difficulties in recruiting, due in part to the distortions of the furlough scheme, and wage rises are likely to maintain upward pressure. The Treasury Consensus for CPI currently suggests 2.1% by Q4 this year, remaining at broadly the same rate in 2022.
  • Whilst inflation is not a key concern, there are risks that it may 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.
  • The Bank of England’s Monetary Policy Committee again held interest rates at 0.10% at its May meeting. Members voted unanimously to hold the rate and judged that the current policy was appropriate given the wider economic conditions. It has not extended its programme of quantitative easing since 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 government borrowing since the start of the COVID-19 crisis. The government borrowed £303 billion in the year to March, the highest since records began in 1946, taking total public sector debt to £2.1 trillion, the equivalent of 97.7% of annual GDP, the highest ratio since the 1960s. In the March Budget, the Chancellor announced that the UK is predicted to borrow a peacetime record of £355 billion in 2021 and will total £234 billion in 2021-22.
  • 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. The prevailing low interest rate environment means the cost of servicing this debt is manageable, but a sustained rise in interest rates could make this level of debt more problematic. 

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, May 2021 (forecasts); ONS, Experian, Carter Jonas (last 5 years)

    • The shifting and unpredictable nature of lockdowns and social distancing restrictions has severely impacted the physical retail sector over the last year, and the third lockdown in England was clearly a further major setback. The reopening of the retail sector on 12 April was hugely significant, although town centre footfall remains well below pre-pandemic levels.
    • Despite the reopening, the sector still faces significant headwinds, including a possible further rise in unemployment, low consumer confidence and the ongoing long-term shift online. However, there is a significant pent-up level of household savings accrued during the lockdown which has the potential to unleash a short-term increase in retail spending.
    • With the vaccine rollout and wider positive sentiment around the economy, GfK’s Consumer Confidence Index for April increased one point to -15, its highest reading since March 2020, although it clearly remains well into negative territory. Within this overall figure, the indices looking ahead 12 months increased the most, with the Economic Situation Index increasing 13 points and the Personal Financial Index rising 6 points. The Major Purchase Index also increased substantially, rising 8 points to -11.
    • Online retailing’s share of the overall sector rose from less than 20% pre-lockdown to peak at 36.3% in January 2021, although with some volatility reflecting the prevailing level of COVID-19 restrictions. As at April, online has fallen back to 29.4% of total retail sales, reflecting the easing of the national lockdown, but still well above the pre-COVID-19 level.
    • 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 an improved shopping environments.
    • 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.
    • Retail rental values had been declining for 18 months prior to the COVID-19 crisis, and this trend accelerated sharply in early 2020. Average all-retail rental values have fallen by -8.0% in the 12 months to April 2021, according to the MSCI Monthly Index, compared with -5.6% over the previous 12 months. The rate of decline over three months is now somewhat slower, however. From January to April 2021, average retail rents fell by -1.4%, equivalent to -5.3% annualised.
    • The third lockdown in England reversed previous tentative steps back to the office, and has prolonged 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 considering 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. Despite restrained letting activity across many key commercial centres, 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, but experienced only a modest fall of -0.8%, bottoming out in November 2020. Between November and the latest data as at April 2021, average UK office rental values have been almost unchanged, rising by 0.2%, with the result that average office values are now only -0.6% lower than a year ago. However, there are noticeable differences across the market, with annual rental value growth to April for the West End & Midtown at -1.7%, compared with -0.8% in the City of London, -0.7% for the rest of the south east, and +0.3% for the rest of the UK.
    • 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 has been 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.
    • 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 have continuing to rise throughout the last year, although at a slower rate than pre-COVID-19. The year-on-year rate in April 2021 was 3.2%, well above inflation, representing a steady rise from a low point of 1.8% pa in September last year. Measured over three months, the growth rate is even faster, at 1.4% between January and April, an annualised equivalent of 5.6%. Given the recent acceleration in the quarterly rate, the annual rate is likely to rise further.
    • Activity and investment volumes have shown considerable resilience given the broader context, particularly as capital fund raising has been challenging with many investors continuing to delay decisions.
    • The first quarter of the year is traditionally relatively subdued, but this trend has been amplified in 2021 by a dearth of quality purchasing opportunities. Q1 saw purchases totalling £6.1 billion, with volumes down by 58% on Q4 2020 and 55% on the same period of 2020. However, there is significant pent-up buyer appetite from both UK and overseas investors as they await an increase in availability and deliverability of good quality assets and, for overseas buyers, an easing of travel restrictions.
    • Overseas investors continue to show good appetite for UK commercial property, dominating the acquisition of large value assets. During Q1, this investor group accounted for 62% of the total investment value, exceeding the proportion achieved last quarter and the highest since Q1 2020. Investors from the US contributed the most to the figures, totalling more than £1.7 billion.
    • Distribution warehouses and quality multi-let industrial estates remain highly sought after, and the industrial sector overtook office property for the first time in terms of total investment volumes, with more than £2.5 billion traded in Q1, almost half that of the previous quarter but about 70% above Q1 2020. Across the sector, overseas investors were the most dominant, accumulating two thirds of the total investment value including nine of the top ten deals during the quarter.
    • In the office sector, quarterly investment was down by close to 75% on Q4 2020 and 60% on Q1 2020, reaching £1.5 billion. The low number of large deals in London added to this fall, with only two £100+ million transactions in the capital. As with the industrial sector, overseas investors remain very active, contributing to almost 75% of all acquisitions, by sale value, during the period. Just £630 million was invested in retail property, with a further £85 million in the hotel and leisure sector during Q1.
    • Laboratory and high-tech space is at a premium, with strong competition for the relatively few purchasing opportunities, and upward pressure on pricing.
    • Uncertainties over the outlook for long-term occupier demand have pushed many investors higher up the quality curve, although there is also continued interest in value-add situations where the underlying real estate fundamentals are strong. Many investors are now focussed on a narrower range of sectors, given the uncertain long-term outlook for occupational demand in sectors such as retail and offices.
    • Buyers are generally feeling upbeat about the prospects for a relatively rapid economic recovery, particularly given the success of the vaccination programme, the clarity provided by the Government’s roadmap out of the lockdown, and the significant pent-up level of household savings and consumer demand.
    • 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 downward shift to 6.07% by April 2021, driven by the industrial sector (MSCI).
    • 10-year gilt yields have been on a long-term downward path, as the global economy has shifted to a lower interest rate environment. However, the UK gilt yield has now risen a little, but is still historically low at 0.8% as at mid-May. This compares with the all-property equivalent yield of 6.07% (MSCI Monthly Index, April). We may well see further rises in gilt yields as the prospects for higher inflation increase.
    • All-property capital values have been falling consistently for the last two and a half years, driven by the readjustment of the retail sector. Following the start of the COVID-19 crisis, all three mains sector saw a drop in values. In the industrial sector the fall was brief and modest, at less than 3%. The sector has now seen several months of rapid capital value increases, and values as at April 2021 are an impressive 11.5% higher than a year previously. This reflects the continued strong investor appetite for the sector coupled with above-inflation rental value growth.
    • In contrast to industrials, office capital values have fallen by -4.7% in the 12 months to April, and retail values are -9.6% lower, and are continuing to fall. However, the rate of decline is now moderating noticeably – back in January, office capital values were falling by -6.0% pa and retail values were falling by -16.8% pa.
    • The fall in values for UK shopping centres remains particularly stark, at -22.8% in the 12 months to April, reflecting the disproportionate impact of COVID-19 and the wider restructuring of the retail market on this subsector.
    • The all-property annual total return turned positive in March 2021 at +2.6%, having been negative since the start of the COVID-19 crisis (bottoming out at -2.9% pa in August 2020). Performance improved further in April, to +4.9% pa. Annual industrial sector returns stood at a very impressive 16.8%, the highest figure since December 2018. Office sector total returns are also now positive at +0.2% in the 12 months to April, whilst retail returns have improved to -2.8% pa.

    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: