Big challenges remain for CRE development viability in the UK

Since our previous report on UK commercial real estate a year ago, construction materials price inflation has retreated rapidly and supply chain bottlenecks have eased, reducing pressure on construction costs.
Some are therefore asking if this is a good time to get back into the market and re-initiate development activity. But we think a widespread pick up in development activity is unlikely.
What you will learn:
- New development looks difficult to justify without underwriting strong rental growth. We estimate that developers would need 7%-9% per annum rental growth for a typical office, logistics, or residential scheme to be viable. This is more than double our UK CPI forecast over 2023-2025.
- Financial pressures from surging material costs and supply chain disruption are easing in the UK. However, material prices are still almost 50% higher than pre-pandemic levels and wage growth remains strong.
- The transition to net-zero and the effect of workforce ageing on labour supply are both likely to push construction costs up over the medium term.
- In the short-term, the scale and likely persistence of recent interest rate rises is the chief headwind to development activity, placing a premium on new space in the market.
Tags:
Related Posts

Post
Development viability hinges on stronger rental growth in the UK
In the current environment of high construction and debt costs, new office development in the City of London looks difficult without strong market rental growth. We estimate that developers would need nearly 6% per annum rental growth for underwriting to stack-up.
Find Out More
Post
Digitalisation and Modern Methods of Construction
Digitalisation and modern methods of construction will support the decarbonisation of infrastructure and built assets.
Find Out More
Post
US banks selling Commercial Real Estate loans underscores tighter credit conditions
The bank loan disposals over the past several months are evidence of the impact from tighter credit conditions on CRE. Elevated interest rates and CRE price declines are forcing banks to assess, and possibly offload, some of their CRE debt.
Find Out More