Eddisons, partner sponsor of the Bondholder Dinner – The impact of location on commercial property values

There are a host of different factors that determine the value of a commercial property. Everything from the physical characteristics of the building, the transport infrastructure and the local economy to its profit and income, environmental contamination and the opportunity for development all have an effect, which can make the valuation process quite complex. 

 A study into the impact of these various valuation factors shows that one factor we haven’t mentioned – location – has the biggest impact of all, accounting for 24% of a commercial property’s valuation. And anecdotal evidence supports that. Parts of London have the highest average commercial building values in Europe, while warehouse rental costs in London can be up to three times more than in the rest of the UK. 

 When determining the value of commercial properties, valuers look at both the macro- and micro-location. The macro-location is the broader area such as the district or region, while the micro-location is the property’s immediate location – the road and neighbourhood. When categorising a commercial property’s location, the local economy, traffic and transport, parking and environmental factors all come into play, as does the income potential in the area, And the better the location, with all else being equal, the greater the property’s value per square foot of space will be.  Inner cities 

Businesses tend to favour urban areas because they have one major advantage – proximity. They are close to transport links, infrastructure, labour, materials and the market. Being within easy reach of other businesses also provides access to knowledge. These benefits are significant enough to persuade firms to pay a premium to be there. 

 As such, commercial property prices in the UK are highest in cities. Currently in the UK, London and Cambridge are the most expensive business locations. However, even within those cities, there can still be considerable variation in property values based on location. This is particularly the case in London, where prices in Kensington and Chelsea or Hammersmith and Fulham can be seven times higher than the same size commercial property in areas of Barking and Dagenham.  The suburbs 

Although commercial property values are generally around 50% lower per square metre in the suburbs, there are still some areas where you can expect to pay a premium. These often apply to retail premises in busy town centres as well as popular out-of-town retail outlets. 

 Several of London’s satellite towns, such as Guildford and St Albans, have expensive commercial space. That’s because they’re relatively big towns in their own right and close enough to London to enjoy some of the proximity benefits that brings. There’s also access to a skilled workforce and excellent transport links. 

 Out of town 

Commercial property values in rural areas fall to around a third of those in city centres, mainly due to a lack of access to good transport links, materials and skilled workers. This is also true in inexpensive city centres that do not attract high-skilled business investment. 

 For certain types of businesses where space is a priority and skilled workers are less important, such as warehouses and distribution hubs, an out-of-town location can be attractive. However, there will be a knock-on effect on things like transport costs and delivery times for businesses to factor into their budgets. 

 The impact of the pandemic on commercial property values and location  

The coronavirus pandemic affected some of the major factors influencing commercial property values, but particularly location. Hybrid and remote working models that were introduced as a temporary measure during the pandemic have stuck, causing many tenants to downsize or relocate their workspace.  

 There has also been an increase in demand for ‘satellite’ offices away from city centres to better accommodate new working preferences. One survey found that 79% of workers would be happier to return to their office if it was just five or 10 minutes away from their home. With that in mind, employers are creating more local, physical offices as a way of boosting collaboration, engagement and staff retention.  

 There has also been a growing interest in coworking spaces, particularly in the southeast, with companies creating spaces that serve the needs of their workers in their local communities. That has seen a rise in suburban and out-of-town office and retail destinations, as workers and consumers continue to prioritise the convenience of their locations.  

 After the deserted city centres we saw during the pandemic, the value of prime office space in city centres is also recovering.