Brokers should stop looking for the next winning commercial property sector
Conor McDermott discusses the growing importance of individual asset quality over broad sector trends in commercial property lending.
Commercial property has always gone through periods when one sector attracts all the attention. A few years ago it was industrial. More recently, retail parks have come back into favour, while parts of the office market are beginning to attract renewed interest. It is easy to assume the market moves in broad themes like these, but I think that has become a much less useful way of looking at commercial property.
From where we sit, the biggest divide today isn’t between offices, retail and industrial. It’s between assets occupiers genuinely want and assets they don’t. That might sound like a subtle distinction, but it changes the way brokers should think about presenting cases and the way lenders assess them.
The data tells a different story
The latest RICS UK Commercial Property Monitor shows occupier demand remains mixed, with retail recording a net balance of -16%, offices -4% and industrial 3%. At the same time, the report points out that much of the recent improvement is being driven by London, while many regional markets remain more subdued.
On their own, those figures might suggest a market still lacking conviction. Yet the MSCI Monthly Index, referenced in Carter Jonas’ Commercial Market Outlook, shows rental values continuing to grow across offices, industrial property and parts of the retail market. Rather than contradicting one another, I think those reports are describing different sides of the same coin. Occupier demand hasn’t disappeared, it has just become much more selective.
Stop chasing sectors
Brokers often ask which sectors lenders are most interested in. Personally, I’d argue that’s becoming the wrong question altogether. The better question is why one asset attracts funding while another, sitting in exactly the same market, struggles to do the same.
Whenever I’m asked where we’re seeing opportunities, the honest answer is that it’s really, really varied. Some of the sectors we found attractive a few years ago have become much more mainstream, while opportunities have appeared elsewhere because individual assets make commercial sense rather than because an entire sector has suddenly become fashionable. That’s something we’ve seen time and again as markets change.
The gap between good assets and average assets is widening
One of the themes running through the Carter Jonas outlook is that occupiers remain focused on modern, energy-efficient buildings, while speculative development has remained relatively limited. That combination has left many markets short of the highest-quality space, helping to support rental growth even where overall demand appears relatively subdued.
People often describe this as a flight to quality, but quality means different things depending on the asset. It might be location. It might be the strength of the tenant. It might be the specification of the building or the resilience of the income.
For me, that’s where the more interesting opportunities lie. The common theme isn’t the sector, it’s that people are following the cash flows and the asset opportunities rather than trying to crystal ball which sector will succeed and which won’t.
That also explains why two office buildings can produce completely different lending outcomes. One may continue attracting occupiers because it meets modern requirements and sits in the right location. Another may struggle despite sharing exactly the same sector classification. The same principle applies across retail, industrial and many of the alternative asset classes.
What this means for brokers
I think this changes the conversation brokers will have with lenders. Broad sector trends still provide useful context, but they no longer explain everything. Demonstrating why an asset will continue attracting occupiers, how its income is expected to perform, what local supply looks like and how the borrower plans to manage the property often carries far more weight than pointing to a positive report on a particular sector.
Commercial property hasn’t become more difficult to understand. If anything, we’re simply asking better questions than we were a few years ago. We spend far less time trying to work out which sector will outperform another and far more time understanding the individual asset sitting in front of us.
Trying to predict the next winning sector might make for an interesting debate, but it isn’t how lending decisions are made. The brokers who recognise this and build their cases around the strength of the asset, rather than the reputation of the sector, will put themselves in the strongest position to secure funding.
Conor McDermott is director of SME lending at LHV Bank
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