How is the commercial real estate market performing?

Like many other markets, commercial real estate has struggled in recent years due to a variety of challenges, from COVID to the cost-of-living crisis, with offices closing and more people working from home.

So how is the market performing now and what is the outlook for 2024?

What is the outlook for the commercial real estate market?

Tom Renwick (pictured), head of business banking at Atom Bank, said 2023 has been a challenging year for commercial real estate.

Rising interest rates, he said, have impacted appetite from investors, the result being that activity levels have been noticeably lower than in recent years.

“Some experts are already forecasting base rate cuts in the second half of next year, which, if correct, means we may see more competitive pricing and a boost to interest in investing in commercial assets,” he said.

The lower base rate, however, Renwick said, will not automatically translate into lower rates for commercial clients due to the prospect of the introduction of the next stage of the Basel international banking standards; Basel 3.1.

Under the existing proposals, he said banks will need to dramatically increase the level of risk-weighting they apply when lending to small and medium enterprises (SMEs), which would be particularly impactful on those looking to borrow against commercial property.

“The danger is that as a direct result of these standards, banks will pass on the increased costs of capital directly on to borrowers, effectively wiping out the benefits of any base rate cuts,” Renwick said.

Renwick believes there will likely remain real challenges for borrowers in certain sectors looking to raise the funds they need.

“As we approach the new year, this emphasises the need for brokers to identify the lenders who are genuinely committed to supporting these business sectors,” Renwick said.

Business insolvencies, he believes, will also be a talking point for all of those active in the commercial sector. Data from the Insolvency Service recently found that company insolvencies are at their highest level since 2009.

“While they may have peaked, the reality is that insolvencies are likely to remain at an elevated level throughout the year ahead as a result of the ongoing economic challenges we face,” he said.

What innovations are needed in business lending in 2024?

While the government has pulled back on some of its green pledges, Renwick said, this still seems the likely direction of travel in the future. As a result, he said lenders will need to think creatively about how they can support business borrowers in improving their own green credentials.

“Another area ripe for innovation is Open Finance; we have already seen improvements both in customer journeys and customer outcomes from lenders successfully leveraging Open Banking,” he said.

Utilising this properly, Renwick added, could lead to a more efficient experience for everyone involved in a transaction.

“Real-time granular transactional data can be mined to verify income, derive affordability and identify risk indicators, a significantly fuller record of transactions than the old way of relying on a few months of bank statements,” Renwick said.

However, Renwick believes only the surface is being scratched here, and it could be that 2024 represents a breakthrough year on greater use of Open Finance, with the government legislating its expansion into non-payment accounts for business and personal customers.

This, he added, is the sort of development that could make a tangible difference to lending in the commercial space, and would be heartily welcomed.

“Finally, there is the question of politics; with a general election on the horizon, there is the temptation for the incumbent government to focus on short-term issues, which may prove vote winners, as opposed to tackling more long-term, systemic challenges,” Renwick said.

Equally, he believes there will be businesses who adopt a ‘wait and see’ approach to their own activities until they have a better idea of the priorities of the next government.

How is the commercial real estate market performing? Let us know in the comment section below