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Commercial Property

UK Construction Intelligence Report
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From small beginnings in 2018 and 2019, we expect the use of technology to be increasingly in the spotlight in commercial real estate during 2020, accelerating the digital transformation of the workplace. Collecting and analysing data will further evolve becoming key to informing how we design and operate our buildings. The PropTech evolution will continue apace with an ever-growing talent pool attracted by investor’s' appetites for this nascent and promising sector.

The investment in technology, data and analytics will grow to span the whole real estate lifecycle from portfolio management to workplace utilisation to building operations. There are challenges however that could limit this growth. Current returns are low and the historically conservative real estate market needs to shake off traditional practices to fully embrace this brave new world. This is happening but is by no means universal.

It may be that a new wave of "versatile facilitators” will emerge who understand both industries and can relate to both groups and can leverage the potential of technology in the design, occupation and management of buildings to create real value and enhance the occupier’s workplace experience.

This will demand a greater focus on the quality and the nature of the data collected; require stronger governance around the use and trade of data and the feed the introduction of more intelligent systems into building’s design. In turn, this is likely to drive building owners and occupiers to re-evaluate their business models and internal resources to make best use of the technology-based solutions available. Once established, the next phase for PropTech will see it fully leveraged to address sustainability issues that have thus far proved elusive or uneconomic to implement.

The link between governmental and corporate objectives on climate, community & diversity will become further hard wired with commercial real estate in 2020, which could be the year in which we see the tipping point towards incorporating societal and environmental metrics to measure the success of development projects, particularly urban regeneration schemes.

With greater accountability and transparency required by major occupiers there will be increased public and political attention on environmental issues and the ambition for a net zero real estate industry will intensify across portfolios. 2020 could also be the year in which impact investment and ESG investment (Environment, Social, and Governance) become mainstream. As an example, the understanding of the effects of pollution on health and workers’ concentration levels is now widespread and as pollution monitoring becomes more accessible, air quality will become a major factor in location decisions and extend from the office market to industrial, logistics and beyond.

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Offices

The lack of new development in the past few years has led to a chronic shortage of good office space in many markets and vacancy rates are at historic lows in London and the major UK cities. This compressed supply in the office market will lead to rental growth in London and the Big Six and encourage developers to re-start stalled or deferred projects to address the immediate demand.

London is also likely to benefit from the UK finally leaving the European Union, as financial institutions and like businesses seek to secure a foothold in the capital before the end of the year. At present it is thought there are over 1,500 businesses looking for office space in London.

Commentators are also suggesting that demand for space will be a factor in other key cities in the UK. The desire of major university towns like Manchester, Leeds, Liverpool, Edinburgh and Bristol to retain their graduate workforce, whilst at the same time government agencies and large corporations migrate north and west, will stimulate growth in speculative office development in these locations.

The flex market will continue to expand in 2020 but with increasingly new and imaginative business models. Occupancy rates are predicted to hold up and new operators will enter the UK market, particularly US providers in London. However, the growth in the flex market brings with it some risks and challenges around flexibility of space, services and leases changing the traditional structures between building owner and occupier. Rather than take remainder unlet space in new developments, flex space providers will increasingly develop their own new office buildings for occupation by themselves.

There will be greater interest for mixed use spaces where office, public space, retail and leisure are combined to enhance the “experience” in the workplace. This will create an opportunity to apply technology more efficiently. The growth in smart buildings and the data they create provide PropTech the ideal environment to add value and in turn, flourish.

Another strong driver for growth in this market segment this year will be the need to respond to changing occupier requirements such as health and wellbeing in the workplace, sustainability, energy efficiency and technological connectivity. Much current building stock is simply not able meet these increasingly more stringent requirements and needs to be replaced with modern, future-proofed office buildings.

Retail

Retail is going through major disruption, exacerbated by a set of imposing technological, social, demographic, and economic forces. In 2020 and subsequent years retail assets will need to be transformed and difficult portfolios reworked.

Physical stores will remain an integral part of the retail ecosystem, but to survive and thrive in the current environment, retailers will need to be more proactive to consumer needs and enhance the shopping experience. As such, retailers must dedicate the time, investment and resources to take advantage of new technologies and adopt omni-channels strategies.

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Shoppers need to be enticed with a mixture of click and collect, touch and feel, food and beverage, leisure and entertainment to make the shopping experience feel worthwhile and enjoyable. This will drive a change to shopping mall and centre design and content. The forecast is for an increase in retail asset remodelling and refurbishment during 2020.

Areas soliciting investors’ interest will continue to be urban locations and prime sites in major city centres where there is dynamic footfall, often from a combination of shoppers, workers and tourists. Other key target segments include designer outlet centres, experiential flagships, luxury shops and leisure focused or activity-based retailers.

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Industrial & Logistics

As e-commerce continues to grow from on-line retailers but also from traditional High Street retailers now expanding their online platforms, demand for warehouse and distribution space is forecast to increase and rents to grow. This growth forecast is predicted across most of the UK as the popularity of e-commerce expands.

One of the challenges facing this market sector is getting goods to the point of delivery in cities like London as urban centres become more congested and logistics become more complex. There is also an increasing polarisation in the segment between on the one hand large, regional logistical centres and on the other small local distribution hubs – the “last mile” providers.

Developers will be more creative to provide supply in these locations and a new asset is emerging. There will be more interest in incorporating logistics facilities into suburban shopping centres and create Microdepots and other forms of shared hubs to tackle the lack of logistics land in urban locations.

In summary, this sector is predicted to grow and consolidate further this year.

The future of the future

Our prediction for 2020 is a year of growth for the commercial real estate sector but also a year of continued change, change driven by environmental, low carbon, socio-economic and human well-being objectives. It is also certain that these objectives will continue to become ever more stringent, stretching the ability of the industry to react in the required timeframe.

By its very definition the commercial real estate sector needs to address market requirements, and therefore needs to adapt to this change in order to flourish and make an economic return. The future is here and the need to future proof our commercial buildings is paramount. Designs and specifications that were acceptable to the market in the recent past no longer address this emerging agenda and need to change.

Industry standards have been developed and continue to evolve which both address these objectives and help guide developers and occupiers alike. These include:

BREEAM 2018

The standard for certifying the sustainability rating of buildings, including the construction process


WELL Building Standard

A standard for certifying a buildings capacity for promoting human health and well being


WiredScore

A certified schemes that rates a building’s communication infrastructure and internet connectivity


Net Zero Carbon Buildings

A pathway to achieving net zero carbon in the construction and operation (energy usage) of buildings. For a commentary on how Faithful+Gould have been able to assist with meeting the challenges and achieve net zero carbon follow this link Faithful+Gould Achieving a Carbon Net Zero Estate

Faithful+Gould have specialist teams supporting our commercial clients and our in-house our delivery teams on all aspects of a building’s lifecycle, including safeguarding to future requirements. This includes being at the forefront of developing resilience for net zero strategies Faithful+Gould Building Resilience for Net Zero Adaptation and meeting the wider climate change challenges Faithful+Gould Rising to the Challenge of Climate Change