Lending for commercial construction is expected to fall for the ninth year in a row, underlying how demand for office space and high street retail has declined over the period.

The analysis comes from specialist property lending experts, Octane Capital, which compared lending levels across different areas of the property construction industry over the past decade using data from the Bank of England. Octane then estimated where total lending would sit come the end of 2023 based on the current data available (Jan to November). 

The analysis shows that the average monthly amount outstanding across the commercial construction lending sector has gradually fallen from £5.11 billion in 2014 to £3.383 billion in 2022, a drop of 34%.

Octane Capital estimates that 2023 will see this figure fall by a further -2.6% in 2023 to £3.30 billion, following on from an annual decline of -4.3% in 2022 and a minor reduction of -0.8% in 2021.

Rental recession and challenging year for retail

Last year office rentals in London were said to be in “rental recession” due to the number of empty workspaces, as the pandemic has facilitated a growing work from home and flexible working culture.

Meanwhile the high street has struggled to compete with the growth of online retail for some time, while consumers are currently being squeezed by the cost of living crisis. In January the The British Retail Consortium warned that retailers are set for a “challenging” year in 2024 due to “weak consumer confidence.

Overall construction lending dips for second consecutive year

The analysis by Octane Capital also shows that lending across the construction sector as a whole is forecast to fall for a second consecutive year in 2023, as interest rate rises made borrowing gradually less affordable.

Octane Capital estimates that the average monthly total of outstanding lending will reach £33.26 billion in 2023, marking a -7.1% drop from the year before, while in 2022 there was also a drop, at -4.0%.

The second consecutive annual decline follows the Bank of England base rate hike from 0.25% to 5.25% between December 2021 and August 2023, making the cost of borrowing far more expensive for construction and development firms.

Development down but domestic construction sees uplift

Commercial lending for the development of buildings – which encompasses structural alterations, demolitions and rebuilding – has been on the steady decline since 2021. 

Octane Capital estimates that some £12.74 billion of outstanding lending will be recorded in 2023, which will again result in a drop of -7.9%, following previous yearly falls of -5.3% in 2022 and -4.3% in 2021.

Lending for domestic construction – a dwelling where more than one family unit lives – is the only construction type expected to go against the grain.

After dropping off by -19.8% in 2021 it recovered by 9.2% in 2022, and is estimated to climb by 1.7% in 2023, as is forecast to sit at £6.04 billion for the year.

CEO of Octane Capital, Jonathan Samuels, commented:

“Demand for commercial construction lending has seen a consistent decline in recent years, with the average monthly amount outstanding falling by 34% between 2014 and 2022 and expected to fall further in 2023. 

“While the pandemic accelerated the trend for more businesses to embrace hybrid working, it must have come as a shock to the office sector, as it’s ultimately businesses paying competitive rents that justify these construction projects.

“Another factor hitting construction is the cost of financing, as it’s becoming harder for developers to make a good return on their investment given that interest rates are relatively high.

“One positive is that interest rates now look to be falling again, so it could become more affordable for developers to fund projects in 2024 and beyond, which should help cultivate some growth, albeit this will likely remain subdued versus historic highs.”

Data tables and sources

• Data on construction lending sourced from the Bank of England.
• 2023 data based on the latest between January and November, with December’s data point based on the average amount lent per month over the course of the year.

Data tables and sources can be viewed online, here.

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