Commercial Market Outlook

Overview

• Global economic conditions are expected to remain broadly steady, with the IMF’s January 2026 Outlook forecasting global growth of 3.3% in 2026, easing slightly to 3.2% in 2027, following an estimated 3.3% expansion in 2025. While tariffs, policy uncertainty and slowing momentum in high-tech sectors are expected to weigh on activity, these effects are projected to fade through 2026 and 2027. The outlook is underpinned by an upward revision to the 2026 forecast relative to October, reflecting more resilient underlying growth despite ongoing regional divergence.
• 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 1.0%.
• Labour market conditions have continued to soften, with employment edging lower and unemployment rising to its highest level in almost four years. Jobs growth has stalled, and payroll data point to a further easing in labour demand. While earnings growth remains elevated in nominal terms, this increasingly reflects lagged wage adjustments rather than underlying labour market strength, set against a backdrop of weakening employment conditions.
• The Bank of England has begun to ease monetary policy as inflationary pressures have moderated. 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. While CPI inflation edged higher in December following several months of decline, the Committee continues to judge that underlying inflation is moving towards target, while maintaining a cautious and data-dependent approach to the pace of any further rate reductions. 
• Monthly indicators continue to point to an uneven economic environment. Manufacturing activity has stabilised, with survey data moving marginally into expansion territory, while services growth remains modest amid weak demand and fragile business confidence. Construction activity continues to face significant pressure, with declining output and employment reflecting delayed investment decisions and ongoing uncertainty. Across sectors, businesses continue to report cautious client behaviour, reinforcing a challenging near-term operating backdrop despite some tentative signs of stabilisation.
  
   

Recent output trends and indicators

• Monthly GDP grew by an estimated +0.3% in November, following an unrevised -0.1% decline in October and +0.1% in September (revised from -0.1%). By sector, services expanded by 0.3%, production rose by 1.1%, while construction contracted by -1.3%. Over the three months to November, GDP increased by 0.1%, with construction exerting the greatest downward pressure, falling by -1.1%. This sector has been slowing since May 2025 and is now recording its weakest three-month performance since March 2023.
• The December S&P Global Manufacturing PMI rose slightly to 50.6, up from 50.2 the month before. This is now the second month of expansion in this sector, after a full year of contraction. Output rose for the third month in a row, supported by new work orders, which expanded for the first time in 15 months. Nevertheless, employment continued to decrease for the 14th consecutive month, with respondents citing high and rising labour costs.
• The services sector PMI also rose in December, albeit very slightly, to 51.4 from 51.3 in November. This marks the eighth month in a row of expansion in this sector, although the pace of growth is only marginal. New work orders, however, grew at a modest rate above the overall 2025 average, with survey participants noting signs of client confidence following the pre-Budget lull. Employment levels, though, continued to fall for the 15th month in a row, although the rate of decline is moderating. Input cost prices rose to a seven-month high, and business expectations for the year ahead rose to their highest level since October 2024.
• The Construction PMI also rose in December, up to 40.1 from the five-year low of 39.4 in November. This still reflects a full year of contraction in the sector and the sharpest decline since the Covid pandemic period. Respondents cited a lack of confidence from clients, resulting in a sharp reduction in new orders and clients delaying investment decisions prior to the November Budget. Disaggregated, civil engineering was the only sub-sector which rose in December as both housing activity and commercial construction continued to fall by the most since May 2020.
  
   

Labour market

• The UK unemployment rate was 5.1% in the three months to November, unchanged from the previous period and the highest rate in almost four years. The rate of employment was estimated at 75.1%, up from 74.9% in the three months to October. Total employment increased by 82,000, with both higher employee and part-time self-employment increasing. 
• The early estimate of payrolled employees for December 2025 shows a decline of 184,000 over the year and 43,000 on the month. This figure, however, is likely to be revised when more data becomes available next month.
• Between October and December 2025, job vacancies rose by 10,000 compared to the previous quarter. However, they remain 69,000 lower than during the same period the previous year. 
• Total average weekly earnings in the UK (excluding bonuses) rose by 4.5% in November 2025 (year on year). This is down from 4.6% over the previous period and marks the slowest rate of growth since April 2022. Earnings growth for the public sector averaged 7.9% (although this is affected by some public sector pay rises being paid earlier in 2025 than in 2024), while the private sector saw an average of 3.6%.
  
   

Inflation

• UK inflation rose to 3.4% in December 2025, up from 3.2% in November and the first month-over-month increase since June 2025. The largest upward contributions came from alcohol and tobacco, as well as transportation, with additional rising cost pressure from food and non-alcoholic beverages.
• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 3.2% in the 12 months to December 2025, the same rate as the 12 months to November; the CPI goods annual rate rose from 2.1% to 2.2%, while the CPI services annual rate rose from 4.4% to 4.5%.
  
   

Interest rates

• There was no meeting of the Bank of England’s Monetary Policy Committee during January, therefore Bank Rate remains at 3.75%. The next meeting is scheduled for 5 February 2026.

Retail occupier market

• December’s retail sales volumes rose 0.4%, following a fall of -0.1% in November and -0.8% in October. Growth was driven primarily by non-store retailers including online jewellers where strong demand for precious metals was reported. Supermarkets and auto fuel recorded gains while department stores, clothing retailers, households and other outlets showed declines on the month. Online shopping performed well, increasing 1.8% month on month. 
• GfK’s Consumer Confidence Index rose one point to -16 in January. Of the five sub-measures, three showed improvement over December; notably, the forward-looking Personal Financial Situation measure rose four points to +6, and the Major Purchase Index increased by one point to -10. However, the forward-looking General Economic Situation measure dropped a sharp five points to -45, suggesting that while consumers feel confident managing their own finances, their confidence in the wider economy remains very low.
• The Q4 2025 RICS UK Commercial Property Survey reports a net balance of -21% for retail occupier demand, unchanged from Q3, but a sharp deterioration from -13% in Q2 and the weakest reading since 2022.
• Following a sharp decline between 2018 and 2021, average retail rental values have increased modestly since 2022, according to MSCI. Annual retail rental value growth continued to strengthen through most of 2024 and 2025, rising from 0.5% in January 2024 to a peak of 2.6% in both September and November 2025. However, momentum eased at the end of the year, with annual growth moderating to 1.9% in December 2025 (MSCI Monthly Index).
• Average rental value growth in the retail warehouse subsector was 3.1% in the 12 months to December 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 December 2025), the annual equivalent of 3.4% (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 0.6% in December. During the three months to December, rental growth has turned negative to -1.0%, equivalent to an annualised rate of -3.9% (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 Q4 2025 RICS UK Commercial Property Survey reports office occupier demand stayed in negative territory at -5%, down from -4% in Q3. 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 3.5% in December, up from the earlier high of 3.3% recorded in October 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 8.4% in December, 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 2.9% 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 1.3% in December 2025. Growth in the regional markets is stronger at 4.3% (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 Q4 2025 RICS UK Commercial Property Survey indicates that industrial occupier demand remains in negative territory, with a net balance of -2%. However, this represents a modest improvement on the -6% reading recorded in Q3, suggesting that demand conditions may be stabilising after weakening earlier in the year.
• 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 4.7% in December 2025, still above general inflation.
  
   

Transaction volumes

• A total of £17.5bn was traded in Q4 2025, representing a 78% increase quarter-on-quarter and a 13% rise year-on-year. Quarterly volumes were also around 32% above the five-year quarterly average, reflecting a strong year-end uplift in deal completion. Reported volumes exclude transactions where the real estate value cannot be robustly separated from operating business considerations, most notably Welltower’s circa £5.2bn off-market acquisition of a UK care home portfolio from Barchester. The rolling annual total edged up modestly to £47.8bn, remaining broadly stable quarter-on-quarter but still around 10% below the five-year average of £53.2bn, highlighting that while momentum improved materially in Q4, the recovery in annual volumes remains uneven.
• Approximately 32% of Q4 investment was in London, below the five-year average of 35%, with overseas capital accounting for 42% of the total.
• In Q4 2025, industrial assets accounted for the largest share of UK investment activity at 32%. Alternatives followed at 27%, with offices at 22% and retail assets at 19%. When compared with their respective five-year quarterly averages, industrial and retail investment materially outperformed, sitting around 45% and 37% above trend, respectively. Alternatives were broadly in line with their longer-term average, while office investment moved back above its five-year quarterly norm (around 22% above), continuing the improvement seen through recent quarters and signalling strengthening liquidity in the sector as pricing adjusts.
  
   

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 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 in early February 2026. More recently, gilt yields have eased modestly, slipping from around 4.7% earlier in the month to about 4.5% at the beginning of February, 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 3.4% per annum in December 2025 (MSCI Monthly Index).
• With sustained all-property rental growth and relatively stable yields, annual all-property capital growth turned positive in December 2024, accelerating to 2.7% by May 2025. Growth eased in late 2025, standing at 1.3% in December.
• Looking at capital value performance over three months rather than 12 confirms a clear loss of momentum, with growth over the three months to December effectively flat at just 0.04%, down from a recent peak of 1.3% in December 2024. On this basis, the annual rate is 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 December 2025 standing at 4.0%. In contrast, office capital values are still falling on an annual basis, at -2.3% over the 12 months to December 2025, although performance is continuing to improve. Retail capital growth is currently between industrials and offices at 1.7%.
• The all-property annual total return has remained firmly positive since early 2024 but has moderated more recently, easing to 7.1% in December, according to the MSCI Monthly Index. Sector performance continues to vary between sectors: retail remains the strongest performer at 8.8%, followed by industrial at 8.0%, while offices continue to underperform the all-property average, with annual total returns of 3.0%.
  
   

Investment outlook

• 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.