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.

This is according to analysis from specialist property lender, Octane Capital, which shows that the average monthly amount outstanding across the commercial construction lending sector has gradually fallen from £5.11bn in 2014 to £3.383bn in 2022, a drop of 34%.

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

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 British Retail Consortium warned that retailers are set for a “challenging” year in 2024 due to weak consumer confidence.

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 £33.26bn 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.

Commercial lending for the development of buildings – which encompasses structural alterations, demolitions and rebuilding – has been on the steady decline since 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 £6.04bn for the year.

Octane Capital chief executive Jonathan Samuels, comments:“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”.

He adds: “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.”