Reflecting on the commercial market

Time is certainly flying in 2023 – and it’s hard to believe we’re now reaching those crucial last months of the year and starting to look ahead into the next year.

For me, having joined the business back in July, it’s certainly been an exciting journey to date.

Commercial real estate is a real passion for me – so taking on the role of regional lead for the north was a very natural next step.

Ongoing change

I certainly picked a very interesting time to move into the role. 2023 has definitely seen its fair share of volatility, and the commercial market is at least 50% smaller than it has been – on average – in previous years. 

This upheaval began with the market turbulence following last September’s mini-Budget, and we saw the impact this year, with higher interest rates being just one of the consequences, and a shock to the system compared to the rates of the last decade.

For commercial investment, volumes were down – certainly in quarter one – which have been more noticeable because of the smaller numbers available in this part of the sector.

However, after a low point in quarter two where the sector reached ‘rock bottom’ in terms of market activity, and investors waited to pursue their next purchase in the hope of further price drops, we’re now seeing signs of things stabilising, although it’s still true to say that many investors are still waiting for more certainty around rates, before they act.  

View of the market

One of the recent trends brought on by market volatility is a move towards investors pursuing diversification of their portfolios. For example, a commercial investor branching out into buy-to-let or holiday lets.  

This allows them to spread the risk across their portfolios, as well as to spread income and capital growth, as different sectors are behaving differently in terms of the speed at which property assets are appreciating in value.

There are also other factors at play here. For example, the cost-of-living crisis may lead to more purchases of holiday lets, as holidaymakers potentially restrict their abroad travel and choose to stay local – a similar trend to that which we saw during the pandemic.

As for sector specifics – prime assets are doing well. Retail in particular, has had a transformation since the pandemic with lower quality assets disappearing – so now we’re left with better value assets as a result.

Retail warehousing is also doing well – again – because of the pandemic, which created a drive for online shopping – which continues – and industrial property is also in high demand, although this is largely due to the limited supply of stock.

In the world of office space, there are some challenges. Prime office space is doing well because workers who have returned to the office fewer times a week want a higher quality office experience with space to collaborate rather than lots of rows of desks – they want to feel that going into the office is worth the trip.

So, there are a lot of lower quality or older stock office buildings around, and vendors may struggle to get these rented out or sold.

EPC changes – what next?

Looking further ahead, there may be hurdles which will affect investor purchase behaviour moving forwards.

For example, although the Government has recently scrapped requirements around EPC regulations, it seems by no means certain what may be required in the future instead to achieve energy efficiency targets.

And this is certainly something on the minds of investors – who are actively seeking out higher quality, more energy-efficient properties.

It’s also true that many lenders will still base their decisions to lend on the quality of the assets in question – for example those which are energy efficient with low carbon emissions.

These are issues which will only become more important in the future.

On the horizon

As to the next six months and beyond, I’d expect to see a release of pent-up demand from commercial investors with the ability to purchase – perhaps returning to the market where they see value to be had.

I imagine we’ll also see a gradual increase in property value for commercial investment property over the coming years, across all sectors.

I’d also expect to see a rise in capital raising by investors, as the value of their investment increases – which will in turn stimulate the economy and can only be good news for us all.

Closer to home

As for us, our focus will be on the continued development of our propositions and products to serve our valued brokers and their clients, and the strength of our teams who sit at the heart of our business, as we face into the last months of the year and 2024.

For my own team – we’re looking at recruitment – including promoting internal talent – to best serve our brokers and customers.

We’ve recently promoted Barry Dillion to the position of senior relationship director, where he’ll be looking at delivering the most complex loans in the Yorkshire region, as well as taking the lead for broker engagement.

These types of steps are testament to our desire to ensure we have the right people in place to support quality lending in the regions as we move into the future.

And I for one – am really looking forward to what that future will bring.

Mark Heckels is regional director of the north team at YBS Commercial Mortgages