Whether the former PM’s growth agenda was achievable or not, its reception by the financial markets was the main reason why her premiership was so short. Whether the delay to 17 November of the new Chancellor’s Halloween statement is sensible or not, the markets are in a febrile enough state that they are likely to respond negatively to both the delay and then the eventual release of the statement and the OBR report.

As our prime yield table shows, commercial markets are repricing fast, and price discovery is happening more quickly than we have ever seen before in a falling market. Admitting that prices need to move is a good thing, but we do think that we are still running the risk of entering a sustained period of lower levels of activity either because of fear, greed or confusion.

Opportunistic investors in both direct assets and debt appear to be rubbing their hands with glee at the market turmoil and possibility of forced sales, though this could rapidly turn to disappointment if they are too aggressive on the scale of discount that they are looking for. Look back to that post-Brexit referendum period when some investors were looking for 40% price reductions, but most failed to find them.

At the other end of the spectrum, there are vendors who are hoping that this time next year everything will be fine. Their wishes are probably just as unlikely to come true as those who are hoping for a GFC-style correction in values. A higher cost of borrowing than we have been used to over the last decade is here to stay (albeit with the cost of debt being lower in 12 months’ time than it is today). Higher energy prices are also likely to remain a fact of life for the next five years, and we all have to recalibrate our thinking to these new worlds.

Do these various factors mean that prices need to keep falling until yields are higher than the cost of debt? In our opinion, no. Younger readers might find a grain of comfort if they look at the chart below, which looks at the spread between the prime West End office yield and the yield on a five-year gilt. For much of the 1980s and 1990s the market functioned perfectly well with a reverse of the spread that we have been used to in the 2000s, and there is no reason why once we have adapted to this new funding environment that market activity should not return to ’normal’.

Are occupational risks rising?

There is no doubt that the storm clouds are gathering over the UK economy, but the latest consensus view is that GDP will only contract by a modest -0.3% next year (compared to an 11% contraction during Covid). Business surveys are pointing to a rising tide of corporate caution, and cost control will swing into cost-cutting over the winter.

These factors will undoubtedly lead to tenants delaying making occupational decisions if they can, and for office-based businesses who have been looking at mostly empty floors for all of this year, this latest shock might be enough to stimulate a call to their agent to explore sub-letting.

However, even in the face of a modest recession, we remain optimistic about the outlook for the office and logistics occupational markets in particular. Both sectors proved their resilience through a much worse economic period in 2020/21, in some cases delivering record prime rent levels. The factors that drove this resilience are still in place, specifically an undersupply of prime space and a contracting development pipeline that will not alleviate this undersupply.

The combination of weakening confidence and rising construction prices has meant that we have seen fewer-than-expected refurbishment and development starts this year, and there is no doubt that this trend will continue into 2023. As the chart below shows, this means that the actual level of completions in 2025 and beyond is likely to be substantially lower than expected, which in turn will drive stronger-than-expected rental growth.