As lockdown continues, the UK commercial investment market is largely on hiatus. Transactions are still occurring, but these are for units that were already in advanced stages of negotiation before lockdown began. This is reflected in the latest reporting from PropertyData, which shows transaction volumes of £808m for April. While accepting this could rise as more transactions are reported, this is the lowest monthly volume recorded since November 2008, when the market was reacting to the Lehmann Brothers collapse.

The lack of transactional evidence has meant it has proved difficult to set yields. However, based on current market sentiment of anticipated pricing for prime stock, the Savills average yield has shifted outwards by 25bps and now stands at 5.31%, its highest level since October 2013 and the largest monthly move since July 2016, when the market reacted to the EU referendum. While some sectors are continuing their outward trajectory, there is no reason why yields will not stabilise for sectors where the occupier fundamentals remain strong, which we examine below.

As lockdown conditions are relaxed, we expect liquidity to return for prime units as potential buyers are better able to validate their assumptions on voids and rental growth. For value-add opportunities, it may be a slower process as investors have to contend with more uncertain underwriting inputs and more expensive financing.

Vacancy rates are cause for optimism

One of the most overused phrases in economic times of stress is “this time it's different”, however, when it comes to the vacancy levels in every business space market we cover it really is very different when compared to the time around the Global Financial Crisis (GFC).

Indeed, taking the year before the previous vacancy peak we have identified that, on average, vacancy rates are 616bps lower today than they were before they started to rise around the GFC.

Perhaps justifying the continued interest from the investment community is the industrial and logistics sector where vacancy rates have fallen from a peak of 23% and now stand at 7%. Using data from MSCI demonstrates that rents have always increased when vacancy has been below 12%. This will mean that the sector remains well insulated as it would take an additional 40m sq ft of supply to come forward to reach the 12% tipping point.

While central London office vacancy hasn’t been as volatile over the last decade, it currently stands at 4.85%, which is 88bps lower than 2006. Whereas in the regions office vacancy has fallen from 18% to 8% over 10 years. As with the industrial market, much of the space currently under construction is already pre-let to tenants and further speculative development, at least in 2020, is unlikely, meaning that it is possible that Grade A vacancy rates will actually move inwards and create further supply shortages for occupiers.

The outlier is the retail sector where data from PMA shows that town centre vacancy has been trending upwards ever since the GFC and it is likely that the current situation will amplify this trend further.

To conclude, the lower levels of vacancy should mean that pressure on prime rents, with the exception of retail, is not as intense as in the aftermath of the GFC.

One of the clear winners of the current crisis has been online retailers who have managed to continue trading with socially distant procedures in place.

Online retail trade body IMRG have been tracking weekly sales volumes which show that for the last four weeks sales have been 34% above the corresponding weeks in 2019, growth levels not seen since 2008.

We anticipate that online retailers will come to the market with requirements for more warehouse space. However, this may not be for some time as, in the most part, most retailers are still in crisis mode and not yet considering their longer-term strategies.

Moreover, any increase in demand will have to be offset against the increase in availability that will inevitably come as the crisis pushes more retailers into administration.