Commercial property is an important part of the UK economy, but the retail and office sectors as still suffering and rising interest rates present a real threat.

A recent report carried out by property consultancy, Lichfield, commissioned by the British Property Federation (BPF), finds that the sector recovered strongly in 2022. Coming out of the Covid pandemic the sector has faired perhaps better than expected, supporting a record number of UK jobs.

The BPF carries out an annual assessment of the commercial property market in the UK. This takes in the sector'�s economic economic performance: it looks at the involved jobs, the labour market, the sector'�s output and turnover, the tax revenues generated for the government and capital investment across the sector.

According to the report, the UK commercial real estate sector, either directly or indirectly, supported more than 2.6 million jobs in 2022. That represents, throughout the supply chain, a 10% increase on 2019, the equivalent says the report of one in every 12 jobs.

The BPF identified an annual economic output of �137.5 billion generated by the UK commercial real estate market (a 28% increase on the year and 18% higher than pre-pandemic) with a contribution to the Exchequer through employment, transaction taxes and business rates amounting to over �42 billion in 2022.

Despite the difficulties following Brexit, Covid and the war in Europe, businesses in the sector have continued to invest heavily, with total capital investment reaching nearly �73 billion and supporting over 450,000 jobs.

Melanie Leech, Chief Executive, the British Property Federation, has said:

'The commercial real estate sector has demonstrated its resilience and despite a challenging economic outlook during 2022 is now supporting an even greater share of jobs across the country and contributing billions of pounds to the national economy.

'Businesses operating in the sector are continuing to navigate a combination of external pressures including build cost inflation, interest rates and skills shortages in key areas. At the same time they are fully committed to tackling the urgent need to reduce embodied and operational carbon emissions.

'This report shows what a significant economic partner the sector is to government and the importance of ensuring that it works effectively in partnership with the public sector not only to stimulate growth and increased productivity, but to create healthy sustainable communities across the whole country.'�

Crisis on the high street

Britain'�s high streets however are still in crisis, with approaching 3,000 shop closures last year, and with major retailing chains and independents struggling to maintain sales revenuse.

The cost of living crisis and inflation don'�t help, but the root cause goes much deeper. Out of town and edge of town retail parks, parking costs in-town, online retailing and deliveries all have their parts to play.

There is no easy solution despite Government efforts to revive town centres with its levelling up agenda. There are other steps that can be taken according to Sirius Property Finance.

One such measure could be adjusting business rates by introducing new rateable values based on figures taken on April 1, 2021, thereby allowing for the Covid pandemic'�s severe impact on rental values. But, as the company points out, it may be too little too late as this measure fails to take into account the drop in retail rents over the same period, significantly diminishing its effectiveness.

Smaller businesses and independent shops based outside of London are particularly affected. The evidence is readily apparent: just over 500 stores and over 5,600 jobs have been lost already in 2023. Although some of these may be transferred or replaced, some will be lost for good.

It'�s a major issue for landlords. When a property becomes vacant all the costs fall back on the landlord, and if there is often a long void period. It takes deep pockets to see the crisis through. When a commercial tenant leaves the liability for business rates falls directly onto the landlord. There is a three-month exemption period for empty shops, but after that the landlord pays full business rates.

That'�s not all, insurance also falls back on the landlord too and when a unit is empty the premium can easily double because of the higher risk. Therefore security measures may be needed and utilities bills also become payable.

During the current economic climate, when good tenants are hard to find, and re-letting can be a length process, the rating grace period of three months is far too short. Lengthening this could make a big difference.

The government'�s Levelling-Up and Regeneration Bill is currently progressing through Parliament, but its promises as a solution, granting local authorities more powers to take over any high street property that has been vacant for over one year, is not popular among landlord. This would auction vacant properties off for rental to the highest bidder, to the benefit of the local economy, but not necessarily in the landlord'�s interests.

Not an ideal solution to the high street crisis think many industry experts. Most see reforming of the business rates system as the most urgent action and key to saving Britain'�s high streets.

The logical solution, according to Sirius, is to provide rates relief, with an overhaul of the business rates system long overdue it says. With retail property currently accounting for around 25% of all business rates paid by UK companies, despite their adding less than 10% to GDP, it all seems out of proportion.

Meanwhile, internationally

Rising interest rates as posing higher risks to US banks. Commercial loans look like destabilising some US banks as interest rates there threaten to rise to around 7%. JPMorgan CEO Jamie Dimon has warned that commercial-real estate loans could cause problems for US banks.

The US banking sector is still recovering from its worst crisis since the 2008 financial crisis, but these difficulties may have further to run, with the JPMorgan & Chase CEO Dimon warning that the next issue to hit the US banking system could come from commercial real-estate loans.

Higher interest rates, tighter credit conditions, and the trend to working-from-home, are causing vacancies in the office sector. All that'�s causing concerns about potential loan defaults by property borrowers in the US, and what happens there is often followed up here, where interest rates are also set to continue to rise.