Since 2020 we have been living with the whole Working From Home (WFH) phenomenon. This has had opposite effects on residential and commercial property, increasing the demand for the former as people have wanted more space at home, while reducing demand for the latter since, on any given day, fewer people have attended the office.
WFH has potentially spelled a pretty grim picture for the office sector. And on top of that, there is a whole raft of environmental and regulatory impositions that will either bring massive refurbishment costs to owning office property or even make large swathes of the office sector unlettable.
Fortunately for the owners of office property, on WFH the tide appears to have turned. More people are deciding that WFH is not good for them, either personally or in regard to their careers.
Meanwhile, quite a few employers have started to crack down and insisted on more office attendance or even office attendance full time. Naturally, this trend doesn’t yet seem to have hit the public sector.
Moreover, although we naturally accept that a rising population underpins residential demand, we should acknowledge that it will also indirectly do the same for the demand for commercial property, covering all three sub-sectors, retail, office and industrial.
The upshot is that although it is difficult to see very rosy immediate prospects ahead for commercial property, neither do the prospects look dire. Moreover, UK banks have significantly reduced their exposure to the commercial property sector from about 12pc of all UK bank loans by value in 2009 to about 7pc now.
Accordingly, my suspicion is that the UK financial system is not going to suffer acutely as a result of weakness in the commercial property sector, although the US looks more exposed.
That said, markets and policy-makers are surely right to worry that, after such a long period of very low interest rates and easy money, as monetary policy tightens, then parts of the economy and financial system will get into trouble. But they are not necessarily the same parts that got into trouble before. The risks probably lie mainly elsewhere – perhaps in places that hardly figured in previous crises.
Roger Bootle is senior independent adviser to Capital Economics
