Commercial Market Outlook

Overview

• The IMF has raised its forecast for global GDP to 3.0% in 2025, up from 2.8% in April, and expects further growth of 3.1% in 2026, bolstered by easing trade tensions, improved financial conditions, and front-loaded corporate activity.
• CPI inflation was 3.8% in August, unchanged from the July figure, which was the highest since January 2024. The Bank of England now forecasts a peak near 4% in September, gradually easing to around 3.6% by the end of 2025 and 2.7% by Q3 2026.
• As expected, the Bank of England’s Monetary Policy Committee did not cut Bank Rate in early September. The Committee remains divided and has signalled that further cuts will be cautious and data-dependent amid persistent inflation risks.
• The UK economy expanded by 0.3% in Q2 2025, slowing from 0.7% in Q1, according to the ONS. The Bank of England’s August Monetary Policy Report projects growth to remain subdued, with underlying four-quarter GDP growth averaging around 1.25% through year-end and only modest improvement expected in 2026. The Treasury’s consensus forecast (September 2025) shows GDP growth of 1.2% in 2025, easing to 1.1% in 2026, while the IMF remains slightly more optimistic with projections of 1.2% for 2025 and 1.4% for 2026.

Recent output trends and indicators

• Monthly GDP is estimated to have shown no growth in July, down from +0.4% in June and in line with expectations. Although there was some growth in services output (0.1%) and construction (0.2%), this was offset by a fall of -0.9% in production output.
• The UK Manufacturing PMI (S&P Global) remained in contraction for the 11th month in a row in August, falling to 47.0 from 48.0 the month before. Subdued client confidence and worries about costs amid rising National Insurance contributions and minimum wages was cited by many as leading to a sharp drop in new orders. This lower demand led to falling employment levels.
• The UK Services PMI meanwhile rose sharply to 54.2 in August, up from 51.8 in July and the strongest reading since April 2024. New business also rose at its fastest pace since September 2024 with strong demand from international and domestic purchasers. Workforce reductions however continued, now in the 11th month of cuts and the longest stretch since the 2008-2010 downturn (outside of the pandemic). Input costs rose sharply in August and output charges also rose.
• The Construction PMI remained in contraction during August, for the eighth month in a row. Registering a figure of 45.5, this was a slight improvement from 44.3 in July but is now the longest continuous period of contraction since early 2020. Steep declines in both residential and civil engineering work were recorded, while commercial construction reduced at a slightly slower rate. Employment numbers reduced at the fastest pace since May, purchasing activity declined at its sharpest rate in three months and projections for the year ahead were the least upbeat in over two years.

Labour market

• The employment rate remained relatively stable this month compared with last, moving to 75.2% (three months to July) from 75.3% the month before. The unemployment rate remained unchanged for the third month in a row at 4.7%. 
• Estimates for the number of pay-rolled employees in the UK show a fall of 127,000 over the 12 months to August, including a fall of 8,000 over the last month. This marks the seventh consecutive monthly decline. Disaggregated, Westminster saw the biggest fall in pay-rolled employees, down 2.9%.  (These early figures should be treated with caution though and are likely to be slightly revised).
• The total number of job vacancies fell by 10,000 over the three months to August, marking a total of 728,000 recorded vacancies. This is the 38th consecutive period where vacancy figures have fallen. Vacancies were found to have fallen in 9 of the 18 industry sectors. 
• Average annual earnings growth (excluding bonuses) declined slightly to 4.8% in the three months to July, down from 5.0% the previous month. Annual earnings growth was 5.6% for the public sector and 4.7% for the private sector.

Inflation

• The Consumer Prices Index (CPI / inflation) rose by 3.8% in the 12 months to August, unchanged from the same rate in July. The price of air fares made the largest downward contribution to inflation on a monthly and annual basis. However, upward contributions from restaurants, hotels and motor fuels offset this.
• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 3.6% in the 12 months to August 2025, down from 3.8% in the 12 months to July; the CPI goods annual rate rose slightly from 2.7% to 2.8%, while the CPI services annual rate slowed from 5.0% to 4.7%.
• Inflation is expected to remain elevated through the second half of 2025, with the Treasury’s August consensus forecast projecting CPI at around 3.6% in Q4 2025. The Bank of England, meanwhile, expects inflation to peak at around 4.0% in September before gradually easing back towards the 2% target over the medium term.

Interest rates

• The Bank of England’s Monetary Policy Committee (MPC) voted 7-2 to keep the current Bank Rate unchanged at 4.0% in September’s meeting. Two members voted to cut to 3.75%. Another rate cut late this year remains possible, but may well be delayed until 2026.

Retail occupier market

• UK retail sales volumes rose by 0.5% in August, matching the same (revised) figure in July. The increase was driven by a rise in sales at clothing stores, specialist food shops, and non-store retailers. The sunny summer weather was cited by retailers as a key factor in the sales boost. However, higher petrol prices led to a decline in car fuel sales, which placed downward pressure on the overall figures. 
• September’s GfK Consumer Confidence figure slipped back two points to -19. It has now spent the better part of the last year hovering between -17 and -20. All five sub-measures declined, with the Major Purchase Index moving to -16, while the forward-looking economic indicator over the next 12 months also declined two points to -32, well down from -11 where it sat just over a year ago.
• 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 2.4% in August 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 2.5% in August 2025 (MSCI Monthly Index). Over the three months to August 2025, the rate of increase accelerated sharply to 1.1%, the equivalent of 4.5% over one year, well ahead of the actual annual rate.
• Average rental value growth in the retail warehouse subsector was 3% in the 12 months to August 2025, up from a recent low of 0.6% per annum in June 2023. On a quarterly basis, growth stands at 0.9% (three months to August 2025), the annual equivalent of 3.6% (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 1.8% (August). During the three months to July, rental growth was 0.6%, the annual equivalent of 2.4%.

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 (August 2025) is 2.5%.
• In the West End / Midtown submarket, annual rental growth eased from a peak of 6.7% in July 2024 to 4.7% in April 2025, before regaining momentum to reach 5.6% by August 2025. By contrast, the City of London continues to see much weaker rental growth, at 1.9% per annum in August 2025, a rate that has hovered between 0.8% and 1.3% over the past eleven months (MSCI Monthly Index).
• The rest of the south east recorded average annual office rental growth of just 1.1% in August 2025. Growth in the regional markets is stronger at 2.6% (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 and Pall-Ex agreeing on 408,000 sq ft in Leicester.
• 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 4.8% in August 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 2025, 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 7.0% (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 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 230 basis points at the end of September 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 September 2025 (MSCI Monthly Index).
• With sustained all-property rental growth and yields stabilising following a period of upward readjustment from mid-2022 to early 2024, annual all-property capital growth turned positive in December 2024, accelerating to 2.7% May 2025. This improvement now appears to have lost momentum, with annual growth still standing at 2.7% in August 2025.
• Looking at capital value performance over three months rather than 12 confirms a loss of momentum, with growth during the three months to August standing at 0.3%, down from a recent peak of 1.3% in December 2024. The annual rate is therefore now likely to decelerate.
• Capital growth performance varies considerably across the main commercial property sectors. Industrial and retail are outperforming the all-property average, with annual growth to August 2025 standing at 5.2% and 3.3% respectively. In contrast, office capital values are still falling on an annual basis, at -1.6% over the 12 months to August 2025, although performance is continuing to improve.
• The all-property annual total return has remained in positive territory since early 2024, reaching 8.7% by May 2025 (MSCI Monthly Index) and holding steady at that level in August. By sector, industrial and retail both stand at circa 10.5%, while offices continue to lag the all-property average at 3.8%.

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.