Commercial Market Outlook

Overview

• The US has now struck tariff agreements with several key markets including the UK, the EU, and Japan, meaning an improved global economic outlook compared with earlier this year. The International Monetary Fund has consequently modestly increased its forecast for global output growth in 2025 to 3.0%, up from the 2.8% it expected in April, although growth is still anticipated to be lower than in 2024 (3.3%).
• The annual rate of UK CPI inflation rose to 3.6% in June, the highest since January 2024, and CPI looks set to remain above 3% for the rest of this year. The latest Treasury-compiled consensus forecast (July) expects 3.3% in Q4 2025, falling to 2.3% by Q4 2026.
• Most analysts expect the Bank of England to reduce Bank Rate from 4.25% to 4.0% in August, continuing its gradual easing cycle, although this is not guaranteed given the uptick in inflation.
• Recent figures on UK economic growth have been disappointing, with monthly falls in both April and May (although the monthly reporting is intrinsically volatile). The July consensus forecast is for below-trend growth of 1.1% in 2025, in line with performance in 2024, continuing at broadly the same rate in 2026 (1.0%). The IMF’s July update for the UK is a little more optimistic, forecasting 1.2% in 2025, accelerating to 1.4% in 2026.

Recent output trends and indicators

• GDP is estimated to have fallen by -0.1% in May (month on month), following a -0.3% fall in April. Production output contracted by -0.9%, led by a -1.0% fall in the manufacturing sector and off the heels of a -0.6% decline in April. Construction output also fell, by around -0.6% while Services expanded by an estimated 0.1%. The largest upward contribution in the services sector came from 2% growth in the information and communication sub-sector.
• The UK Manufacturing PMI (S&P Global) rose again in June, although only to 47.7, meaning it is still in contraction territory (below 50). Nevertheless, this marks the third straight month where the figure has increased. Having said that, new orders continued to fall, with weak market conditions reported both domestically and from overseas clients. Input cost prices rose for the 18th month in a row with higher logistics and labour costs cited.
• June’s Services PMI rose to 51.3 from 50.9 in May, indicating continued expansion. New business intakes rebounded albeit the increase was only small, and exports fell again. Inflation subsided with prices rising at their lowest pace in four years. There is continued uncertainty over global and domestic economic conditions, however, and this is weighing on output expectations going forward.
• Although the construction sector PMI rose slightly in June to 48.8, it remains in contraction, where it has been since January. Sharp declines were especially acute in commercial (45.1) and civil engineering work (44.2), even though residential building moved into growth at 50.7. New orders overall fell for the sixth month in a row amid falling demand and client spending squeezes. Business confidence has also dropped to its lowest level since December 2022.

Labour market

• The Labour Force Survey indicates that the employment rate has moved to 75.2% in the three months to May, up minimally from 75.1% in the previous three months. The unemployment rate meanwhile also increased marginally to 4.7%.
• Estimates for the number of payrolled employees in the UK show a fall of 178,000 over the year (to June) and a monthly decline of 41,000. This is now the fourth month in a row of falling payroll figures (annually).
• Once again, and for the 36th consecutive period, the total number of job vacancies declined. In the three months to June vacancies fell by circa 56,000 to a total of 727,000. Vacancies decreased in 14 of the 18 industry sectors.
• Average annual earnings growth (excluding bonuses) moved to 5.0% in the three months to May, down from 5.2% in the previous quarter. Public sector wages grew by an average of 5.5% compared with 4.9% for the private sector.

Inflation

• The annual CPI inflation rate rose to 3.6% in June 2025, up from 3.4% in the 12 months to May and well above the Bank of England’s 2% target rate. This also marks the highest rate since January 2024. The largest upward contributions came from transport prices including fuel costs and airfares. There was some partially offsetting downward pressure from housing and utilities costs which rose at a slower rate than in May.
• Core CPI (excluding volatile elements such as energy and food) rose by 3.7% in the 12 months to June, up from 3.5% in the 12 months to May. The annual services CPI rate was unchanged at 4.7%.
• All-items CPI looks set to remain above 3% for the rest of this year. The latest consensus forecast (July) expects CPI of 3.3% in Q4 2025, falling to 2.3% by Q4 2026.

Interest rates

• The Bank of England’s Monetary Policy Committee (MPC) maintained interest rates at 4.25% at their June meeting, with no meeting in July.
• The next MPC decision is scheduled for publication on 7th August, when a 25-basis point reduction in Bank Rate is widely expected, despite the recent uptick in inflation.
• At its last meeting, the MPC noted that underlying UK GDP growth remains weak and the labour market has continued to loosen, leading to clearer signs that a margin of slack in the economy has opened up. It has, however, signalled a gradual and careful approach to base rate reductions.

Retail occupier market

• Retail sales volumes rose 0.9% in June, following a (revised) decline of -2.8% in May. A rise in supermarket sales volumes helped boost food store sales by 0.7%, following a sharp fall of -5.4% in May. The better weather during the month helped increase sales. Auto fuel sales also rose by 2.8%, the highest monthly rise in over a year, also likely due to the good weather.
• Consumers worried about the potential for tax rises in the upcoming Autumn Budget and persistent inflation helped push the GfK Consumer Confidence figure down one point to -19 in July. Of the sub-measures, expectations around the general economy over the next year fell slightly to -29 from -28 in June while the measure of personal finances over the next 12 months held steady at +2. The GfK Savings Index meanwhile rose 7 points to +34, its highest level since November 2007.
• The Q2 2025 RICS UK Commercial Property Survey shows a net balance of -13% for retail occupier demand, unchanged from Q1, although still well up on negative balances of well below -20% seen for much of the period since 2020.
• Following a sharp decline from 2018-2021, average retail rental values have increased modestly since 2022, according to MSCI. Average annual retail rental value growth has continued to accelerate, standing at 2.0% in June 2025, compared with 0.8% a year ago, and the highest rate since 2008 (MSCI Monthly Index).
• Average rents for standard (high street) shops have been rising since May 2023, with the annual rate accelerating to 1.9% in June 2025 (MSCI Monthly Index). Over the three months to June 2025, the increase was 0.9%, the equivalent of 3.6% over one year, ahead of the actual annual rate.
• Average rental value growth in the retail warehouse subsector was 2.5% in the 12 months to June 2025, up from a recent low of 0.6% per annum in June 2023, although down slightly from a recent peak of 2.7% in April. On a quarterly basis, growth stands at 0.3% (three months to June 2025), the annual equivalent of 1.2% (MSCI Monthly Index).
• The annual rate of average rental growth for UK shopping centres finally turned positive at the start of this year, accelerating to 2.0% in April and May, and currently standing at 1.9% (June). During the three months to June, rental growth was 0.5%, the annual equivalent of 2%.

Office occupier market

• Most businesses have now passed the post-pandemic period of office floorspace downsizing, and some are actively adopting policies to encourage (or mandate) employees to return to the office. The provision of high-quality offices remains important to assist with recruitment, retention, and productivity strategies, as well as to enhance staff health & wellbeing. This is reflected in the continued robust demand for prime space.
• Occupier demand is focused on buildings that are sustainable and energy efficient, as occupiers try to meet their ESG aspirations. This is being accelerated by the next round of tightening to MEES regulations, with a minimum EPC rating of C currently due to take effect from April 2027.
• In many key city centre markets, a constrained volume of office development since the pandemic relative to grade A demand means there is now a considerable shortage of prime supply. This is particularly true in central London districts such as Mayfair and St James’s, which have a long-standing undersupply due to their inbuilt physical and planning constraints. But even the core City of London, which is more able to accommodate large-scale high-rise schemes, is now running low on quality floor space.
• In addition to the shortfall of immediately available space, there are only limited options to lease buildings currently under construction. A high number of pre-lettings, in reaction to low immediately available stock, have taken much of the potentially available new supply out of the market.
• We are seeing continued strong demand for serviced and co-working provision from established businesses that wish to lease short-term space, pending a move to longer-term conventional office space. This trend is being accentuated by the uncertain global economic outlook.
• The Q2 2025 RICS UK Commercial Property Survey continues to show a positive net balance for office occupier demand at +2%, although down from +6% in Q1. This is in sharp contrast to the highly negative balances immediately post pandemic.
• Prime rental levels have proved highly resilient, reflecting the supply / demand imbalances for quality stock. Recent development schemes have set new benchmarks in several central London districts and regional city centre markets.
• According to the MSCI Monthly Index, average annual rental value growth for all UK offices peaked at 2.8% in March 2024, and has since fluctuated within a band between 2.1% and 2.5% per annum. The latest figure (June 2025) is 2.4%.
• Average annual rental growth in the West End / Midtown submarket decelerated from a peak of 6.7% in July 2024 to 4.7% in April 2025, but has accelerated again over the last two months to 5.8% in June 2025. The City of London continues to see a much lower rate of growth, at 1.2% per annum in June 2025, a figure that has fluctuated between 0.8% and 1.3% over the past ten months (MSCI Monthly Index).
• The rest of the south east recorded average annual office rental growth of just 0.7% in June 2025. Growth in the regional markets is stronger at 2.9% (MSCI Monthly Index), the fastest rate since just before the pandemic.

Industrial occupier market

• Letting activity has been relatively subdued in recent months. However, there have still been some sizeable transactions, including GXO leasing 885,000 sq ft in Avonmouth.
• Demand continues to be shaped by a variety of economic, political and technological drivers, including requirements for logistics and last-mile distribution hubs, with the gradual shift online likely to continue. Supply chains will continue to evolve, and we expect to see more retailers outsourcing logistics functions to 3PLs, who can use their expertise to reduce costs and delivery times, and increase reliability and sustainability credentials.
• Logistics operators continue to face a shortage of labour in many parts of the UK. Labour costs are increasing, with wages continuing to rise in real terms, on top of April’s rise in the National Living Wage and employers' National Insurance contributions.
• The Q2 2025 RICS UK Commercial Property Survey continues to show a positive reading for industrial occupier demand, although it has weakened noticeably to a net balance of +4%, compared with +9% in Q1, and only just above the recent low of +3% in Q3 2023.
• Vacancy rates have been rising over recent quarters, due to a combination of slowing demand and rising supply, with a number of retailers and 3PLs closing distribution centres as they look to consolidate their operations. However, vacancy at the national level now appears to be levelling off, and with a positive outlook for demand and relatively little speculative supply coming through, we think vacancy will peak this year and begin to decline.
• Demand remains focused on prime, energy-efficient space, particularly as many logistics operators are promoting their ability to maximise their clients’ sustainability credentials within the supply chain. Whilst new schemes are coming forward, the overall development pipeline is restricted, with a low number of construction starts in recent quarters. The relative shortage of large high-quality units in some markets will therefore continue.
• Competition amongst occupiers for existing and new build product has helped maintain upward pressure on rental values despite the lower overall demand levels. According to the MSCI Monthly Index, average annual industrial rental value growth has decelerated from an unsustainably high peak of 13.2% in summer 2022, to 5.0% in June 2025, still above general inflation.

Transaction volumes

• A total of £10bn was traded in Q2 2025, representing a modest 3% decline quarter-on-quarter, 4% down year-on-year and 24% below the five-year quarterly average. The rolling annual total remained broadly in line with the previous quarter and was 14% below the five-year average of £53.3bn.
• Approximately 41% of Q2 investment was in London, above the five-year average of 35%, with overseas capital accounting for 63% of the total.
• Office investment volumes picked up to £3bn in Q2, a 20% increase quarter-on-quarter, meaning that offices accounted for the largest share of UK investment activity at 30%, overtaking alternatives for the first time since Q3 2023. Spending across the alternative sectors declined for a second consecutive quarter in Q2, with £2.5bn transacted, down 35% quarter-on-quarter, and 34% below the five-year average. The alternatives still accounted for 25% of the total, ahead of retail at 23% (£2.3bn) and industrial assets at 22% (£2.2bn).

Recent investment performance

• All-property equivalent yields have been broadly stable over the last 18 months at circa 7.1% (MSCI Monthly Index), following a sustained period of upward movement from mid-2022 to early 2024.
• 10-year gilt yields moved up sharply from near-zero during the pandemic, and have stood at circa 4.5% throughout 2025. This has resulted in a narrowing of the gap between property equivalent yields and 10-year gilt yields, from a recent peak of circa 350 basis points at the start of 2024 to circa 260 basis points at the end of June 2025.
• Average all-property rental values have been rising consistently at a rate of over 3% per annum since February 2022, averaging 3.5% per annum over the last three years. The rate of growth stood at 3.4% per annum in June 2025 (MSCI Monthly Index).
• With sustained all-property rental growth and yields stabilising following the period of upward readjustment, annual all-property capital growth turned positive in December 2024, accelerating to a peak of 2.7% in May 2025, but slowing slightly to 2.6% in June 2025.
• Looking at capital value performance over three months rather than 12 confirms a loss of momentum, with growth during the three months to June standing at 0.3%, down from a recent peak of 1.3% in December 2024. The annual rate is therefore likely to decelerate further.
• Capital growth performance varies considerably across the main commercial property sectors. Industrial and retail are outperforming the all-property average, with annual growth to June 2025 standing at 5.3% and 3.0% respectively. In contrast, office capital values are still falling on an annual basis, at -1.8% over the 12 months to June 2025, although performance is continuing to improve.
• The all-property annual total return has been in positive territory since the start of 2024, accelerating to 8.7% by May 2025 (MSCI Monthly Index), although easing back slightly to 8.6% in June 2025. The industrial annual total return is 10.6%, with retail at a similar 10.3%, and offices well below the all-property average at 3.6% (MSCI Monthly Index).

Investment outlook

• As the summer holiday period begins, market activity is naturally slowing. However, there is a growing sense of cautious optimism across the UK commercial property sector. Recent transactional evidence suggests that capital values are not only stabilising but beginning to recover, signalling renewed confidence among investors. While many sales are being deferred until September, this trend reflects a strategic pause rather than a lack of appetite, as market participants await further clarity on economic conditions.
• Expectations of further interest rate cuts later this year are contributing to the positive sentiment, with the prospect of improved affordability and stronger investor confidence. This optimism is supported by a resilient occupational market, where tenant demand remains steady across most sectors, new supply is limited, and structural demand trends – particularly in logistics, life sciences, and build-to-rent – continue to attract capital.
• Despite these encouraging signs, several risks remain on the horizon. These include the potential for slower-than-expected rate cuts, ongoing macroeconomic uncertainty, and rising occupier costs driven by fiscal changes such as increases in business rates and employer contributions.
• In addition, legislative reforms – most notably the Renters Reform Bill and the potential abolition of upward-only rent reviews – are introducing a degree of uncertainty for investors. Overall, while caution remains warranted, current indicators suggest the UK commercial property market is entering a phase of gradual recovery, underpinned by solid fundamentals and a measured return of investor confidence.