Commercial Market Outlook

Overview

• The November Budget provided much-needed clarity for a commercial property market that has been characterised by a ‘wait-and-see’ mentality in recent months. Prior to the Budget announcement, investor sentiment remained cautious, with several transactions delayed as buyers and sellers waited for details on potential tax reform. While the Chancellor drew on a broad range of revenue-raising measures, there was widespread relief that several of the potential adverse scenarios did not materialise.
• Global economic conditions remain steady, with the IMF’s October 2025 Outlook projecting growth of 3.1% in 2026, a similar rate to the 3.2% expected for 2025. This is supported by improved financial conditions and stabilising global trade dynamics.
• In the UK, the latest data from the Office for National Statistics show that GDP growth remained weak in Q3 2025, increasing by 0.1% following growth of 0.3% in Q2. Annual GDP growth stands at 1.3%, driven by services and construction, while production output declined. GDP per head showed no growth over the quarter but was 0.8% higher than a year earlier.
• The outlook remains one of modest growth. The Office for Budget Responsibility has downgraded its forecasts for GDP growth in each of the next four years. It now expects 1.4% in 2026 and 1.5% per annum from 2027 to 2030. The Treasury consensus expects slightly lower growth in 2026 than the OBR, at 1.1%.
• Labour market conditions have continued to soften, with employment edging lower and unemployment rising to its highest level since early 2021. Jobs growth has stalled and payroll data points to a further easing in labour demand, although earnings growth remains relatively elevated, reflecting ongoing wage pressures despite a weakening employment backdrop.
• The Bank of England has continued to ease monetary policy as inflationary pressures recede. In November, the Monetary Policy Committee voted narrowly to cut Bank Rate by 25 basis points to 3.75%, its lowest level since early 2023. With CPI inflation falling to 3.2% in November, the Committee appears more confident that inflation is moving sustainably towards target, although it continues to stress a cautious and data-dependent approach to further rate reductions. 
• Monthly indicators continue to point to an uneven economic backdrop. Manufacturing activity has stabilised, with the PMI moving marginally into expansion territory, while services growth remains modest amid weak demand and fragile business confidence. Construction activity remains under significant pressure, with output and employment falling sharply. Across sectors, firms continue to report cautious client behaviour and delayed decision-making, reinforcing a challenging near-term operating environment.

Recent output trends and indicators

• GDP was estimated to have fallen by -0.1% during October, following a similar fall of       -0.1% in September and no growth in August. Disaggregated, services output fell by -0.3% while construction output also fell by -0.6%. Production, however, grew by 1.1% in October. Uncertainty surrounding the Budget likely slowed consumer and business spending during the month, while the Jaguar Land Rover cyber-attack continued to affect car production.
• The latest S&P Global Manufacturing PMI for November rose to 50.2, up from 49.7 in October, marking the first expansion reading (above the neutral 50) in over a year. Output grew for the second consecutive month, supported by stronger domestic demand. However, employment declined, with job losses attributed to cost-saving measures and uncertainty ahead of the autumn Budget. Input cost inflation eased to its slowest pace in 13 months, while business optimism reached its highest level in nine months.
• The UK Services PMI fell slightly in November, down one point over the previous month to 51.3. Latest data points to an overall decline in business activity growth across the UK, with weaker demand both domestically and abroad. Survey respondents noted poor client confidence, Budget-related uncertainty and difficult global economic conditions weighing on business growth. Employment levels declined on the month and input cost inflation rose (driven by higher salary costs).
• The UK Construction PMI, meanwhile, fell to its lowest level since May 2020, declining to 39.4 in November from 44.1 the previous month. Construction firms noted weak client confidence and delayed decisions ahead of the Budget. All three sub-sectors experienced their fastest downturns in over five and a half years. Employment also fell at its steepest rate since August 2020 and business optimism was the weakest since December 2022.

Labour market

• The unemployment rate increased again in the three months to October, rising to 5.1%, the highest rate since February 2021. The employment rate, meanwhile, also moved down, to 74.9% with the number of employed people falling again this quarter, down 16,000. This marks the second consecutive decrease in job creation since March 2024. 
• The first estimates for the number of payrolled employees for November 2025 show a decline of 171,000 year on year, and 38,000 on the month. Again, these should be treated as provisional and are likely to be revised when more data are available next month.
• The number of job vacancies is largely unchanged over the quarter, with the first estimates suggesting a small decrease of 2,000 between September and November. 
• The annual average growth in earnings (excluding bonuses) remained at 4.6% in the three months to October, unchanged over the previous three-monthly period. Annual private sector wage growth averaged 3.9% while public sector was 7.6%. This public sector annual growth rate is affected by some public sector pay rises being paid earlier in 2025 than they were in 2024.

Inflation

• The annual rate of CPI inflation slowed to 3.2% in November, the lowest rate in eight months and down from 3.6% in October. The largest downward pressure came from food and non-alcoholic beverages, while price growth also slowed for alcohol and tobacco products, housing and utilities and transport. Upward pressure came from recreation and culture at 2.9% annually.
• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 3.2% in the 12 months to November 2025, down from 3.4% in the 12 months to October; the CPI goods annual rate slowed from 2.6% to 2.1%, while the CPI services annual rate eased slightly from 4.5% to 4.4%.

Interest rates

• As anticipated, the Bank of England’s Monetary Policy Committee voted 5–4 to cut the Bank Rate by 25 basis points to 3.75%, its lowest level since early 2023. With inflation unexpectedly falling to 3.2%, Bank Rate should now move more quickly towards the 2% target.

Retail occupier market

• Retail sales volumes fell by -0.1% in November, following an upwardly revised fall of -0.9% in October. Non-store retailing fell as online jewellers reported a fall in demand for gold products. Supermarket sales volumes also declined, for the fourth month in a row. There was an offset rise in non-food stores (department stores, clothing, household goods) with Black Friday discounting helping boost activity. 
• Consumer confidence rose by two points to -17 in December, according to the latest GfK Consumer Confidence Index, reflecting relief that the Autumn Budget was not as severe as anticipated. All five sub-measures improved, with the Major Purchase Index showing the largest gain, up four points to -11. The -17 reading is unchanged from the same month last year, keeping the Index within the -22 to -17 range for the past 12 months.
• The Q3 2025 RICS UK Commercial Property Survey reports a net balance of –21% for retail occupier demand, a sharp deterioration from –13% in Q2 and the weakest reading since 2022.
• 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 2.6% in November 2025, compared with 0.9% 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 2.4% in October 2025 (MSCI Monthly Index). However, over the three months to November 2025, the rate of increase accelerated to 0.4%, the equivalent of 1.6% over one year, which was below the actual annual rate.
• Average rental value growth in the retail warehouse subsector was 3.4% in the 12 months to November 2025, up from a recent low of 0.6% per annum in June 2023. On a quarterly basis, growth stands at 1.1% (three months to November 2025), the annual equivalent of 4.4% (MSCI Monthly Index).
• The annual average rental growth rate for UK shopping centres turned positive at the start of the year and reached 2.0% in April and May, but has fallen since October, currently standing at 0.8% in November. During the three months to November, rental growth has turned negative to -0.6%, equivalent to an annualised rate of -2.4% (MSCI Monthly Index)

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 Q3 2025 RICS UK Commercial Property Survey reports office occupier demand slipping into negative territory at -4%, down from +2% in Q2. While this indicates a softening in sentiment, the reading remains far less severe than the heavily negative balances recorded immediately after the 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 has strengthened further, rising to a new high of 3.3% in November, up from the earlier high of 2.8% recorded in March 2024 and following a period of relative stability in the 2.1%–2.6% range.
• In the West End / Midtown submarket, annual rental growth has accelerated sharply, rising to 7.3% in November, surpassing the previous peak of 6.7% recorded in July 2024. By contrast, rental growth in the City of London remains materially weaker but has firmed to 2.8% per annum, indicating gradual improvement, according to the MSCI Monthly Index.
• The rest of the south east recorded average annual office rental growth of just 1.0% in November 2025. Growth in the regional markets is stronger at 3.6% (MSCI Monthly Index).

Industrial occupier market

• Although letting activity has been relatively subdued compared to previous years, 2025 saw some significant lettings, including M&S taking 1.3 million sq ft for its National Distribution Centre at Daventry International Rail Freight Terminal, and DSV taking 605,000 sq ft at Mercia Park 2, Swadlincote.
• 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 Q3 2025 RICS UK Commercial Property Survey shows industrial occupier demand weakening further, moving into negative territory with a net balance of –6%, down from +4% in Q2. This marks the first negative reading for the sector since 2012, excluding the initial Covid-19 lockdown period.
• 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 4.9% in November 2025, still above general inflation.

Transaction volumes

• A total of £9.8bn was traded in Q3 2025, representing a modest 2% decline quarter-on-quarter, 2% down year-on-year and 26% below the five-year quarterly average. The rolling annual total remained broadly in line with the previous quarter at £46bn and was 14% below the five-year average of £53.2bn.
• Approximately 23% of Q3 investment was in London, below the five-year average of 35%, with overseas capital accounting for 57% of the total.
• Alternative assets accounted for the largest share of UK investment activity in Q3 2025, with just under £4.5bn transacted, up 71% quarter-on-quarter, 38% year-on-year and 14% above the five-year quarterly average. Industrial investment totalled around £2.1bn, a 7% decline quarter-on-quarter and 38% below the five-year average. Office investment volumes fell to £1.7bn, down 45% on the previous quarter and 52% below the five-year average, while retail investment stood at £1.5bn, representing a 34% quarter-on-quarter decrease and 28% below the five-year average.

Recent investment performance

• All-property equivalent yields have been broadly stable over the last two years at circa 7.0% (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 around 4.6% through much of 2025. This has resulted in a narrowing of the gap between property equivalent yields and 10-year gilts, from a recent peak of circa 350 basis points at the start of 2024 to around 240 basis points at the end of November 2025. More recently, gilt yields have eased modestly, slipping from around 4.7% earlier in the month to about 4.5% at the beginning of January, close to the lowest levels seen since autumn 2025, when yields briefly touched around 4.4%.
• 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 3.6% per annum in November 2025 (MSCI Monthly Index).
• With sustained all-property rental growth and yields stabilising, annual all-property capital growth turned positive in December 2024, accelerating to 2.7% by May 2025. Growth eased slightly in November 2025, standing at 1.9%.
• Looking at capital value performance over three months rather than 12 confirms a loss of momentum, with growth during the three months to November standing at 0.1%, down from a recent peak of 1.3% in December 2024. The annual rate is therefore now likely to decelerate further.
• Capital growth performance varies considerably across the main commercial property sectors. Industrial is outperforming the all-property average, with annual growth to November 2025 standing at 3.8%. In contrast, office capital values are still falling on an annual basis, at -2.2% over the 12 months to November 2025, although performance is continuing to improve. Retail capital growth is currently between industrials and offices at 2.2%.
• The all-property annual total return has remained firmly positive since early 2024 but has moderated more recently, easing to 7.7% in November, according to the MSCI Monthly Index. Sector performance continues to vary between sectors: retail remains the strongest performer at 9.4%, followed by industrial at 8.9%, while offices continue to underperform the all-property average, with annual total returns of 3.1%.
• Following an extended period of repricing, UK commercial property capital markets are transitioning into a phase of pricing stabilisation, rather than a rapid rebound, with sentiment improving as interest rate expectations become clearer.
• Recent performance trends reinforce a shift towards income-led returns, with capital values stabilising and modestly improving, but overall performance continuing to be driven primarily by secure and durable income streams.
• Pricing alignment between buyers and sellers is gradually improving, with narrowing bid–ask spreads supporting a higher proportion of transactions reaching completion, albeit at a measured pace.
• Debt market conditions are becoming incrementally more supportive, as easing interest rates improve borrowing affordability and encourage selective re-engagement with leverage, particularly for well-capitalised investors.
• Investor focus remains firmly on asset quality, ESG credentials and long-term relevance, reinforcing ongoing polarisation between prime and secondary assets, with liquidity and pricing resilience concentrated in best-in-class stock.
• Overall, these dynamics suggest a gradual improvement in liquidity through 2026, underpinned by stabilising yields and income-led performance, rather than a broad-based recovery in capital values or transaction volumes.