Published by the Estates Gazette 19.10.26
When I was at JLL around 20 years ago, our in-house ‘ready reckoner’ of the commercial property cycle was to think of it as a clock face where values moved from a market low point at six o’clock towards a peak at high noon before heading back down to six o’clock and the cycle beginning again.
Talking about ‘what time it was’ in the cycle was a simple way of expressing to investors where the sector was and what was likely to come next.
For a long time, it worked rather well – particularly because, at that time, all asset types in the sector tended to move in-step. So, if offices were approaching ‘midday’, retail and industrial were rarely far behind.
Following the global financial crisis in 2008, this clock became far harder to read. Every time it looked like we were moving into an upswing, something stopped the market in its tracks.
The eurozone debt crisis; the Brexit referendum; Covid; the sharp rise in interest rates and gilt yields that followed the 2022 mini-budget; and a steady stream of global economic and political shocks have each, in turn, halted recoveries that seemed to be under way. The clock not so much stopped as kept being wound back.
The result is a market that has grown wary of its own optimism. Investors have been told “this is the bottom” often enough to stop believing it.
Long-run auction data bears this out. The JLL/IPD Auction Results Analysis Service eventually became the Acuitus Commercial Property Auction Data Report and gives a perspective of auction sale yields going back four decades. Prior to 2008, cycles were lengthy and regular: median initial yields compressed from 9.6% in 1985 to 7.2% in 1989, moved out to 10.9% by 1995, then sharpened steadily to 5.5% in 2007.
Peak-to-peak and trough-to-trough, cycles ran at roughly 18 years. However, since the financial crisis, the median yield has been stuck between about 7.3% and 9.3%, with half-turns in 2010, 2014, 2017 and 2022 that came to nothing. Today it stands at 9.3%, its highest level since the late 1990s.
One clock, or many?
There is now a further market complexity. Are all commercial property sectors moving in unison today? The answer is almost certainly no.
Logistics and industrials have enjoyed a decade of structural demand, driven by e-commerce and supply chain change, and even after repricing as rates rose, occupier fundamentals remain strong. High street retail has endured a long and painful decline. In contrast, out-of-town retail which for years was pretty much out of favour now provides among the market’s more sought-after assets, buoyed by affordable rents, easy access and resilient tenants.
Offices face a double challenge: obsolescence, as tightening energy-efficiency standards leave older stock behind, and the lasting shift to working from home, which has opened a wide gap between prime and secondary space.
Rather than one clock, we now have several, each telling a different time – and running at different speeds!
Reading today’s market
If irrational exuberance marks the top of a cycle, received wisdom often marks the bottom. When the consensus declares a sector finished, capital deserts it, prices overshoot on the way down and genuine value is left behind. The same instinct works in reverse: money flocks into a favoured sector and bids it up beyond what the fundamentals justify.
In the property investment sector, we may like to think of ourselves as independent thinkers, but too often we act like sheep. Those who bought retail parks when received wisdom said retail was dead are now looking rather clever.
The problem with inflection points is that they are only obvious in hindsight. Nobody rings a bell at the bottom of the market. By the time the consensus agrees the turn has come, the best pricing has usually gone.
Analysis of today’s auction sales provides signals that are worth watching. Our auction last month generated the highest number of legal pack enquiries we have seen for several years, and much of that interest was for institutional-grade £1m-plus lots. There is money out there, and it is doing its homework. Investors remain cautious, for reasons we all know, but interest tends to come before commitment, and that is often what a market turning point looks like in its early stages.
Navigating today’s market and finding potentially progressive value requires rigorous stock selection, a clear view of each sector’s fundamentals, and the evaluation of secure income and sensible pricing. It also means being willing to look more closely at opportunities that maybe don’t conform to the current received wisdom in the market.
Perhaps we should stop asking what time it is on a single property clock and start asking what time it is for each sector, and each asset. Those who wait for the six o’clock low point to be confirmed may find the hands have already moved on.
