2020 was an exceptionally bad year for most parts, but not all, of the commercial property market in the Thames Valley, writes Rob Marson, director at Campbell Gordon.
The office lettings market fell dramatically with take-up in Greater Reading, on deals of over 5,000 sq ft, falling to 162,000 sq ft, which is a third of the 10-year average at 430,000 sq ft. This is the lowest figure for the past 25 years, except for the credit crunch when in 2009 take up was 121,000 sq ft. Activity in the town centre was particularly hard hit with take up only reaching a very low 15,000 sq ft. This is the lowest take-up on record, going back 25 years.
On the other hand, the industrial lettings market has performed well. Rents have stayed firm and yields have continued to tighten. One effect of this has been that a plot of land that could suit industrial use or residential use is worth more for industrial development in some locations. Where a site previously might have been suitable for residential development and commanded a value of perhaps £1.5 million per acre, if it is used instead for industrial development the land value may instead be £1.75m per acre. These values of course vary enormously from site to site, but this emerging trend in 2020 looks set to continue into 2021.
The residential development market has had mixed fortunes. Some Thames Valley town-centre flatted development sites have not commanded high values, and indeed a number have failed to sell. However housing sites remain very much in demand, with strong competition from developers looking for the best sites. This demand has been underpinned but the surprising resilience of the private housing market.
There has also been very strong interest in metropolitan sites of scale that suit BTR (build to rent) development. This asset class is still somewhat unknown but has in the past few years taken hold and the pandemic has not diminished the interest or appetite from investors looking to establish themselves in this market. Campbell Gordon are currently advising on BTR development sites in Bracknell, Heathrow, Acton and Watford, with interest from both funds and propcos. The emerging trend in this market has been progression on scale. Operators are now looking for sites that can accommodate at least 250 units, rather than 100+ as was the case at the emergence of this market a few years ago.
Another market that has significantly outperformed the economic context has been open storage. The value of land for this use both on a freehold and leasehold basis has grown very significantly. There is an acute shortage of sites and we have seen very strong interest from a large number of occupiers and purchasers on sites where we have advised landowners.
Perhaps the strongest performing of all uses last year has been the datacentre market. Well placed sites that have scale, along with great power and data connectivity provision are achieving land values far in excess of industrial, residential and indeed office land values. We expect this trend, for the very best sites, to continue into 2021.
So what does all this mean for 2021? A key trend we expect to see is a strong return of the office lettings market. This will take place once we are through the worst of the pandemic and occupiers are allowed back into their offices. While many occupiers have looked with a fresh approach at their office needs, and most if not all expect to reduce their footprint, many are now experiencing a push back from their staff. The early ‘pleasures’ of working from home have for many worn off long ago. Most individuals now want to be able to come into the office some of the time, if not all of the time. We still expect occupiers to look at taking a 20-40% reduction in their office floor space short term, but we believe close to pre-covid office footprints will return in the medium term.
We also expect continuing long-term growth in the residential housing market, metropolitan BTR market, industrial and datacentre markets. In short while the 2020 pandemic has been an immense and unprecedented shock, the Thames Valley commercial property market is extremely resilient across the use profile, and once the pandemic is in full retreat we expect to see a very strong return to the long-term growth trend.
Marson advises on office lettings and acquisitions as well as commercial and residential development projects.
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