The commercial sector is recovering slower than anticipated, with the availability of finance being one cause
Many commentators, myself included, had anticipated that the commercial sector would lead the industry out of the downturn. A slew of recent statistics are challenging how robust this assumption is. Output, new orders, services, banking and financial services business confidence all suggest a trend of stifled activity. Indeed there are few periods in the past 30 years when the value of 12 months of commercial new orders has been so low.
It is a seller’s market and the sellers themselves are under stress
The disappointment is all the more marked given the size of the potential development pipeline and the fact that many occupiers in London and elsewhere need to renew leases on buildings developed in the eighties and nineties. Estimates of the size of this demand in London alone range from 20 million ft2 to 70 million ft2.
The reality is that occupiers are consolidating their space requirements, and outside of London, weak employment growth will hold back demand for new space even more. Occupiers that are in the market for a pre-let also seem content to delay their decisions, although in the long-run, this decision may prove costly as availability of space tightens even more in 2014 to 2015.
One cause of the slow recovery is the availability of finance and in particular the terms on which it is being made available. It is a seller’s market and the sellers themselves are under stress. Conditions on project finance such as high debt to equity ratios and large pre-lets are challenging developers’ profit margin, their leverage of equity capital, and their ability to establish JVs. With major players such as British Land being highly successful in raising finance through bonds, loan facilities and JVs, the development market is likely to continue to be focused on the major players.
Simon Rawlinson is head of strategic research and insight at built asset consultant, EC Harris