Despite economic headwinds, the CRE market demonstrated its characteristic resilience last year. The presence of high-value deals and strong performing sectors will have raised expectations for 2023. But will they be met?
Data from EG Radius has assessed the four major CRE sectors – office, industrial, retail and leisure – and identified 6 trends that could shape the market in the coming 12 months.
1. The planning backlog: will we see a surge in approvals this year?
While the volume of planning applications has been broadly consistent in recent years, 2022 saw a dip in the number of applications receiving permission – down 25% on the previous year.
However, EG Radius data shows that, rather than a lower success rate, this drop in approvals stemmed from a backlog in the decision-making process. Indeed, of the unapproved applications, more than 90% are still awaiting a decision.
Should this backlog ease, approvals could surge this year. But which sectors and regions stand to benefit most?
Aside from residential, the sectors with the largest planning backlogs are industrial (where 49% of last year’s applications are still awaiting decision), leisure (45%) and offices (42%).
In terms of geography, the regions with the largest share of outstanding applications are the South East (13% of the total), London (12%) and the South West (11%) – with all three well-positioned to benefit when the backlog eases.
2. Eyes on the data: can 2023 outperform expectations?
The overall volume of deals and enquiries can be a useful measure of market confidence and a valuable benchmark for future performance.
Based on EG Radius deals in the office market over the past two years, we would expect to see the office sector average 17,000 enquiries and 2,200 deals per quarter. Should the numbers rise in 2023, it would suggest a positive shift in market sentiment.
For the industrial sector, the data suggests a benchmark of 23,000 enquiries and 2,000 deals per quarter, while retail averages 22,000 enquiries and 2,100 deals.
But while deal volumes are a useful metric, they do not always tell the full story. Indeed, one of the more welcome trends for both office and industrial has been a jump in deal values as occupiers prioritise the highest-quality premises.
This rise in deal values was a consistent factor last year, compensating for the decline in volumes. All indications suggest the quality premium will continue in 2023.
3. Build-to-rent: where next for the UK’s rental revolution?
Over the past five years, the number of build-to-rent properties in the UK has doubled, with the sector now accounting for 7% of all new-build homes and more than £4bn in annual investment.
During this time, a consistent trend has been geographical diversification, as BTR investors look beyond London and towards other regions where demand for high-quality rental homes outstrips supply.
Last year, the North East emerged as the BTR champion, followed by the South West and the North West. In terms of boroughs, Hartlepool saw the highest level of construction (with 17 schemes), followed by Newcastle and Durham (both with 12 schemes each).
This regional spread is likely to continue this year, with BTR investors keen to enter the family homes market. The Manchester-based Peel Group recently launched a new suburban BTR venture (Peel L&P) with the aim of delivering 1,000 family homes, the first 100 of which will be in Bolton.
4. Quality over quantity: will premium deals drive the industrial market in 2023?
While overall demand has not returned to 2019 levels, EG Radius data reports that the industrial sector has seen a significant growth in deal values: with the average deal rising from £1.3m to £3.2m.
One important factor is the presence of advanced manufacturers happy to pay a premium for the highest-quality industrial space. What’s more, many of these occupiers are flexible when it comes to location – creating opportunities for investors and developers.
The race for the next hotspot is clearly on. Last month, FTSE-listed Harwood Group confirmed an option agreement to purchase a 168-acre site next to the M1 in Northamptonshire, where it wants to provide 1.6m sq ft of grade-A industrial space with a BREEAM Excellent certification.
Meanwhile, logistics developer St Modwen Logistics is looking to invest £126m in three sites across the South West, including 885,000 sq ft of prime industrial space. The premises will target an EPC A rating and BREEAM Excellent certification, and will also feature EV charging points and solar panels.
5. Will we see a retail recovery in 2023?
Although retail footfall has risen in the post-pandemic period, the high street now faces a new set of pressures, as inflation, labour shortages and declining consumer spending lead some to remain cautious about the sector’s future.
In 2022, EG data showed that both enquiries and transactions continue to lag pre-pandemic levels. Yet a detailed interrogation of the data shows a more nuanced picture, with a number of sub-sectors outperforming the market as a whole.
In regional markets, discount retailers remain a driving force, with Primark, Poundstretcher and supermarkets Iceland and Morrisons all taking on large spaces last year. Creative and lifestyle retailers also continue to perform strongly in London and other major cities.
Could 2023 be the year that the retail market turns a corner? According to EG data from the past two years, the market would be expected to deliver around 22,000 enquiries per quarter and 2,100 transactions. Should the numbers exceed the benchmark, it would be a strong sign that a wider recovery is underway.
Another sector to watch will be the prime market, which continues to draw significant investor interest – particularly in London – driving up overall deal values. Excluding deals less than 10,000 sq ft, the average retail investment (which includes real estate investment trusts) is 70% higher – at £18.8m – and 53% larger – at 105 sq ft – than in 2019.
6. As demand surges, can office transactions beat their pre-pandemic benchmark?
Over the past two years, the office market has been mixed, with a headline drop in overall deals mitigated by a jump in deal values as occupiers prioritise the best quality spaces. But could the slump in deals be about to reverse?
Three years on from the first coronavirus lockdown, occupiers now have a much better idea of how their work patterns have changed – and what they need from their next office. Will those occupiers that delayed moves during the pandemic now look to seek out new space?
There are already encouraging signs. EG Radius data shows that, of all the CRE sectors, the office market was the closest to meeting its pre-pandemic benchmark last year. The market has also recovered well outside of London, accounting for the biggest driver of deals in both Scotland and the South East.
In the capital, the picture is even brighter. Recent data from Knight Frank, shared exclusively with EG, shows that large law firms are currently seeking 1.3m sq ft of office space in London, as overall take-up in the sector hits an all-time high. Based on that, prime agents will expect to be busy.
Overall, the picture for 2023 remains positive, with several sectors well-positioned to outperform the market. Meanwhile, the fundamentals of the market remain strong – suggesting potential for a wider recovery to boot.