Commercial property rentals in the Midlands will fall by at least two per cent in 2009 and in 2010 as the recession begins to bite, according to the latest research.

However, with sentiment in the sector worsening by the week, falls in rental value could exceed these levels, according to the findings of Grimley’s Economic and Property Market Review.

The prospects for the overall economy are no better, says the report, with the UK economy weakened by 0.5 per cent during quarter three and the research predicting a 0.7 per cent fall in output in both the East and West Midlands in 2009 – comparing favourably with national figures that forecast at least a one per cent downturn. The research suggests output would then rise in the Midlands by around 1.5 per cent in 2010 with a sustained long-term growth trend thereafter.

Stuart Morley, head of research at GVA Grimley, said: “The Midlands property market is feeling the effects in terms of reduced occupier demand across all sectors, following strong levels of activity earlier on in the year and the market is likely to remain balanced in favour of the tenant for some time to come. However, there are clear signs that medium to long-term investors may now begin to see value in the UK market and we believe that demand will improve during 2009 for prime investments considered to be of institutional quality.

“Our forecasts show that the difficult economic conditions witnessed during the latter half of 2008 will continue into 2009, but we are hopeful that recent action by government and the Bank of England, in particular the 250 basis points reduction in interest rates and the boost to public spending, will stimulate demand and boost recovery in 2010. What we are saying is, 2009 will be very tough, but by quarter four we could see some light at the end of the tunnel.”

The report found the city centre office market in Birmingham had been very active over the course of the year, with take-up for the year as a whole is predicted to be a record high of around 950,000 sq ft.

“However, enquiry levels have become much more subdued,” said Mr Morley.

“The rate of activity is likely to be much lower for the final quarter of the year and muted levels of demands are anticipated into 2009. The outlook for rental growth in 2009 is also subdued as the impact of slowing economic conditions is compounded by a significant amount of speculative completions adding to supply.”

The picture in retail was much more gloomy, said Mr Morley. “The overall retail environment remains a very challenging one and the Midlands is no exception,” he said.

“The retail market in Birmingham remains very quiet, with a number of new developments being put on hold and many developers reviewing timescales.“

Occupier demand in the industrial market is holding up at present, despite the challenges created by the rates on empty properties and a lack of funding for speculative development.

“The underlying trend is that deals are being done on both a freehold and leasehold basis, but occupiers are trying to drive a harder bargain with developers and owners,” explains Mr Morley.

Apart from projects committed to over six months ago, there is little or no new speculative development with prospective developments being put on hold pending pre-sales and lettings as a necessity to trigger development.

The sector will feel further pressure from January 1 2009 when Energy Performance Certificates will be required on any commercial property disposal. Combined with the mounting costs of void rates on vacant buildings, an increasing number of owners are contemplating demolition of some perfectly serviceable properties.

Industrial rents in the West Midlands have remained stable over the course of the year and at present, demand is holding up well. However, the research warns that too much emphasis on the negative aspects of the market may knock confidence and see conditions deteriorate further.

Ian Stringer, regional senior director at GVA Grimley in Birmingham, concludes: “These are clearly very challenging times for the UK economy and the Midlands property market.”