Europe has seen the biggest slide in sentiment, as investors expect values to fall. The slide has been more pronounced in Europe than in any other world region, with RICS’ global indicator showing a reading of -36 in Europe in Q2, falling from a relatively firm reading of -14 in Q1. Indeed, both headline Occupier and Investment Sentiment indices fell sharply during the second quarter of 2020, posting readings of -44 and -28 respectively across Europe. All European markets covered in the monitor displayed a significant deficit in demand compared to supply in Q2, with the widest discrepancies reported in Romania, Austria and Italy.
Europe-wide, the outlook remains deeply negative within the retail sector, where forced closures of many physical stores and an accelerated shift towards online shopping have been hugely challenging for the more traditional retailers. Indeed, rents and capital values are now both projected to see double-digit annual declines for secondary retail markets across Europe. Furthermore, an aggregate 62% of European respondents now consider the commercial real estate market to be in a downturn phase, up from 47% taking this view back in Q1. Looking at the sector breakdown, while the outlook for rents and capital values is deeply negative across retail, it is more resilient for industrials in Europe. In particular, rents for prime industrial space are expected to hold steady on average, over the next twelve months.
Remote working expected to cause a lasting shift as many office-based roles have been forced into a period of remote working during the pandemic, businesses have had a chance to assess the impact on productivity. In instances where the move has seen efficiency maintained or improved, firms may be prompted to re-evaluate their office space needs. The results of the latest Global Commercial Property Monitor also suggest offices face three key additional or accelerated structural changes globally: organisations reducing their overall footprint, a notable shift in location from urban to suburban, and a greater premium placed on the health and wellbeing of workers.
Simon Rubinsohn, RICS Chief Economist, commented: “As the economic impact of COVID-19 has deepened, so too has the impact on commercial real estate. Sentiment among investors and occupiers has naturally weakened, with the broad acceptance that rental and capital values will fall over the next year. What is clear, however, is that there will be no going back to the old normal, even after a protracted economic recovery and significant government interventions. Underlying trends have been accelerated by lockdowns, whether the global rise of e-commerce or remote working, coming to the fore, changing the nature of the demand for many “traditional” commercial assets. We will see investors, landlords and tenants continue to adapt to a new reality – not least, in their approaches to office space.”