The beginnings of economic recovery in the second half of 2024 followed by more robust growth in 2025 will make UK commercial estate markets increasingly attractive for investors next year, CBRE says in its sector-by-sector forecasts.

According to CBRE’s UK Real Estate Market Outlook 2024, inflation will continue to fall in 2024, before reaching its target in 2025, and the Bank of England is expected to start cutting rates in the second half of 2024. CBRE's research team points out that this will reduce the debt burden on businesses and households, and stimulate growth.

CBRE says mortgage rollover poses the biggest risk to growth forecasts, with 850,000 fixed-rate mortgages due for renewal in 2024.

At a real estate level, CBRE’s head of UK research, Jennet Siebrits, is expecting commercial real estate investment prospects to improve in 2024 as value declines have stopped in some sectors and slowed in others.

“The high interest rate environment along with falling values has created a lack of viability for debt buyers and contributed to a thin market. However, as debt costs fall, this should improve. Equity buyers are set to gain from discounted values, benefitting from favourable net total returns and as yields decompress further, the mismatch between buyers and sellers will close, with transaction activity increasing in 2024," Siebrits forecasts.

But she warns that "divergence in performance" across property types is likely to continue in 2024 and obsolescence, particularly in older office and retail assets, will be a key challenge. “The fall in values and rise in financing costs since mid-2022 will reduce opportunities to profitably refurbish or repurpose older stock until market conditions improve,” said Siebrits.

An industry focus on sustainability will continue. CBRE says there will be a period of "price discovery" as the industry improves its understanding of the cost of sustainability capital expenditures and how sustainable properties perform relative to less sustainable assets. It adds that physical climate risks to buildings and infrastructure will be of growing importance to occupiers, investors and lenders and regulation and disclosure will begin to turn its focus to nature and biodiversity.

Sector-wise CBRE says in the office market, the seriously constrained volumes seen since rising interest rates began in the second half of 2022 will ease in the second half of 2024, but investment volumes in the first half will remain low.

It adds that after moving out in 2023, prime office yields in most office markets will start to compress by the end of 2024. The outlook for the leasing market is more positive it adds, with a supply and demand imbalance for the highest quality buildings in the best locations driving prime rental growth.

CBRE is expecting the creative industries to return to the market in 2024 as a recent trend for these companies to take flex space ends and they start to sign for a "more permanent solution".

In logistics CBRE reports that despite a material reduction in occupier expansion and subdued levels of take-up, it anticipates only moderate vacancy rises next year as the volume of space under construction continues to decrease.

It forecasts that counter-cyclical companies such as discounter retailers and nearshoring businesses will lead demand, together with third-party logistics, which now accounts for 40% of all take-up in the UK. But the market will become increasingly polarissed, with the performance of secondary assets becoming more challenged.

CBRE expects retail pricing to remain attractive versus other commercial sectors. Retail Parks are likely to remain the top choice it says, with interest in Grocery and Shopping Centres set to continue.

Across the private rented sector, the supply and demand imbalance will continue to worsen in 2024. An estimated 15,000 rental properties have now been sold since the start of 2022, when the Bank of England began raising the base rate, and high construction costs, labour shortages and more expensive debt will continue to hold back build to rent development, it says.

Data shows that BTR construction starts in first-half 2023 were less than half of the level recorded in the same period for 2022, which will significantly reduce levels of completions in 2024. In contrast, demand from tenants will remain strong, which will support rental growth.

A record-high student population and broader demographic trends will continue to drive strong demand for purpose built student accommodation next year. But CBRE again says the supply of new PBSA will continue to be hampered by several factors, including onerous planning requirements and the need to modernise existing stock.

CBRE says next year could be the first time hotel occupancy rates surpass pre-COVID 2019 levels, with domestic leisure demand expected to be strong. The continued recovery of inbound tourism will further add to demand growth, notably in London. The adviser says investment volumes are also set to increase in 2024 and as financing and yields begin to stabilise, the buyer-seller stand-off for hotel assets should fade.

Robust trading performance and record investment volumes underpinned a healthy 2023 for the self-storage sector, and CBRE anticipates further growth for the maturing asset class next year. It says structural change, sociodemographic change and investor appetite will remain strong but a lack of investment opportunities will limit investors’ ability to access the market, with partnerships and joint ventures acting as a solution.

CBRE expects take-up in the London data centre market to reach new highs next year, as cloud service providers and enterprises continue to seek capacity.

Take-up levels for 2023 remained at a similar level to the year prior, constrained by limited availability of purpose-built commercial lab space. CBRE predicts 2 million square feet of new supply to come to market in 2024 which will support increased take-up levels, particularly in leading markets such as the golden triangle.

Siebrits said in a statement: “A number of maturing asset classes, notably data centres and self- storage, have outperformed expectations, bucking the wider challenges facing real estate investors this year. As we look to 2024, we expect these sectors to benefit from further growth, underpinned by healthy investor appetite, increased demand and strong fundamentals.”