Commercial Market Outlook

Overview

• Global economic conditions are expected to remain broadly stable in the near term, although uncertainty has increased in recent weeks. The IMF’s latest World Economic Outlook update projects global growth of around 3.3% in 2026, easing slightly to approximately 3.2% in 2027, following an estimated expansion of around 3.3% in 2025. However, renewed volatility in global energy markets and escalating geopolitical tensions in the Middle East have increased downside risks to the outlook. The UK Chancellor noted in a recent emergency statement that sustained increases in energy prices could have a modest negative impact on growth.

• In the UK, recent GDP data continue to point to a subdued but positive growth environment. Output has increased modestly in recent months, with the economy expanding by 0.2% in the three months to January 2026. Despite this improvement, overall activity remains weak and growth momentum subdued. Inflationary pressures had been easing from the peak levels recorded during the earlier energy shock, with CPI falling to around 3.0% at the start of 2026. However, rising oil and LNG prices mean inflation risks have begun to re-emerge, particularly if elevated energy prices persist.

• The medium-term outlook remains one of modest expansion. The Office for Budget Responsibility (OBR) expects UK real GDP growth to moderate from around 1.4% in 2025 to approximately 1.1% in 2026 before strengthening gradually thereafter. The HM Treasury February 2026 consensus forecasts present a similar profile, with independent forecasters expecting growth of around 1.1% in 2026 and approximately 1.4% in 2027. These forecasts were finalised before the recent escalation of geopolitical tensions and therefore do not incorporate the potential economic effects of higher energy prices or increased global uncertainty.

• Labour market conditions are expected to soften slightly in the near term. The OBR forecasts unemployment to rise modestly during 2026 before gradually easing in subsequent years, while the Treasury consensus similarly anticipates unemployment averaging just above 5% in 2026 before declining thereafter. Inflation had previously been expected to return steadily towards the Bank of England’s 2% target, although renewed pressure from energy markets could slow the pace of disinflation.

• Monetary policy expectations have become less clear in recent months. While markets had previously anticipated a gradual easing cycle from the Bank of England during 2026, volatility in energy markets has introduced additional uncertainty to the inflation outlook. Higher oil and LNG prices could place upward pressure on transport and energy costs, potentially delaying the return of inflation to target. In this environment, the Bank of England is likely to adopt a cautious approach to further monetary policy adjustments while assessing whether renewed inflationary pressures prove temporary or more persistent.

• The economic backdrop, therefore, points to a period of modest growth with inflation likely to remain above target for longer than previously expected. Financial conditions are likely to improve only gradually, while energy market volatility and geopolitical developments remain the principal downside risks to the UK economic outlook.

Recent output trends and indicators

• Monthly GDP showed no growth in January 2026, following increases of 0.1% in December and 0.2% in November. Services output was unchanged during the month, while production output fell slightly by 0.1%, and construction rose modestly by 0.2%. In the three months to January, real GDP grew by 0.2%, an improvement on the 0.1% growth recorded in the three months to December. Over this period, services output rose by 0.2%, and production output increased by 1.3%, while construction activity continued to decline, falling by 2.0% following a 2.1% fall in the previous three-month period.

• January’s S&P Global UK Manufacturing PMI rose to 51.8, up from 50.6 in December and the highest expansion figure since August 2024. Output increased for the fourth month in a row with stronger export demand, largely stable domestic conditions and customer restocking measures. Notably, though, the upturn was mostly reported by larger manufacturers, with SMEs reporting the third month of falling production. New orders continued to rise, at their fastest pace in nearly four years, but employment fell again, albeit at a slowing pace.

• The UK Services PMI rose to 54.0 in January, up from 51.4 in December. New business reached a three-month high, driven by increased corporate budgets and client spending; however, sluggish household demand and weak construction activity weighed on some sub-sectors. While export orders climbed due to stronger European demand, employment figures fell for the fourth consecutive month, marking the longest period of job losses in the sector for 16 years. Meanwhile, input costs continued to climb, with firms citing rising payroll, raw material, and technology expenses.

• The UK construction PMI rose to 46.4 in January, recovering from December’s five-year low of 40.1. While this marks the strongest reading since June, the index still signals contraction for the 13th consecutive month. House building remains the weakest sub-sector, though its rate of decline eased slightly. Meanwhile, civil engineering saw a sharp drop, whereas commercial construction recorded its smallest decline since May 2025. Although the slump in new orders slowed, the contraction in employment accelerated.

Labour market

• The UK unemployment rate reached 5.2% in the three months to December, above the 5.1% in the previous three-month period and now the highest rate since February 2021. The rate of employment also subsequently edged down to 75.0%.

• The early estimate of payrolled employees for January 2026 shows a decline of 134,000 over the year and 11,000 over the month. This figure, however, is likely to be revised when more data becomes available next month.

• The estimated number of job vacancies has been relatively flat over recent months. In the three months to January, there was a small increase of 2,000 over the previous three-month period. Total UK vacancies have hovered around the 725,000 / 730,000 mark for the last nine months.

• Annual growth in average earnings in the UK (excluding bonuses) was 4.2% in the three-month period to December 2025. This is down from 4.5% in November and is the slowest rate of growth since January 2022. Earnings growth for public sector workers averaged 7.2% and 3.4% for the private sector. The public sector annual growth rate is affected by some public sector pay rises being paid earlier in 2025 than in 2024.

Inflation

• Inflation eased to 3.0% in the 12 months to January, down from 3.4% in December and in line with market expectations. This marks the slowest rate of inflation since March 2025. Lower price growth in transport and food exerted the greatest downward pressure, while prices in restaurants and hotels rose more quickly over the same period.

• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 3.1% in the 12 months to January 2026, down from 3.2% in the 12 months to December 2025; the CPI goods annual rate fell from 2.2% to 1.6%, while the CPI services annual rate fell from 4.5% to 4.4%

Interest rates

• The Bank of England’s Monetary Policy Committee voted to hold interest rates at 3.75% at its February meeting, with the vote narrower than expected at 5–4 as four members supported a 25 basis point cut. While inflation had previously been expected to move back towards the 2% target during the year, recent geopolitical developments in the Middle East have introduced renewed upside risks to the inflation outlook through higher energy prices. As a result, expectations of further base rate cuts have weakened, with the Bank of England likely to remain cautious in adjusting policy while assessing whether any inflationary pressures prove temporary or more persistent.

Retail occupier market

• The volume of retail sales in January rose sharply, up 1.8% on the month, well above 0.4% in December and the strongest month-on-month rise since May 2024. Growth was marked by a strong increase in non-food stores, with a notable rise in artwork and antiques, while online retailing also increased, particularly in sports supplements and jewellery sales.

• GfK’s Consumer Confidence Index rose one point to -16 in January. Of the five sub-measures, three showed improvements 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 1.8% in February 2026 (MSCI Monthly Index).

• Average rents for standard (high street) shops strengthened through much of 2025, with annual rental value growth peaking at 3.4% in October 2025, according to the MSCI Monthly Index. However, momentum weakened markedly towards the end of the year, and by February 2026, annual rental growth had turned negative at -3.3%.

• Average rental value growth in the retail warehouse subsector was 2.9% in the 12 months to February 2026, up from a recent low of 0.6% per annum in June 2023. On a quarterly basis, growth stands at 0.4% (three months to February 2026), the annual equivalent of 1.7% (MSCI Monthly Index).

• The annual average rental growth rate for UK shopping centres turned positive at the start of the last year and reached 2.0% in April and May, but has fallen since October, currently standing at 1.8% in February 2026. During the three months to February, rental growth accelerated to 1.5%, equivalent to an annualised rate of 6.0% (MSCI Monthly Index).

Office occupier market

• Office attendance levels have continued to increase as many organisations implement more structured return-to-office policies. While hybrid working remains embedded across many sectors, a growing number of employers are encouraging greater in-office presence to support collaboration, productivity and corporate culture. As a result, the provision of high-quality office space remains an important component of recruitment, retention and staff wellbeing strategies.

• 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 of MEES regulations, with a minimum EPC rating of C currently expected to take effect from April 2028.

• 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 stood at 3.1% in February 2026, easing slightly from the peak of 3.5% recorded in December, but remaining above the levels observed earlier in 2025.

• In the West End / Midtown submarket, annual rental growth has accelerated sharply, rising to 7.9% in February 2026, 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 2.5% 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 0.7% in February 2026. Growth in the regional markets is stronger at 3.1% (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 February 2026, 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 rose sharply from near-zero levels during the pandemic and remained elevated through much of 2025, averaging around 4.6%. This has resulted in a narrowing of the spread between property equivalent yields and government bonds, from a recent peak of around 350 basis points at the start of 2024 to approximately 240 basis points by early 2026. More recently, gilt markets have shown increased volatility as investors respond to shifting monetary policy expectations and geopolitical developments, particularly the recent escalation of tensions in the Middle East which has raised concerns around energy prices and inflation. As a result, gilt yields have fluctuated between approximately 4.5% and 4.7% in recent weeks.

• 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 3.3% per annum in February 2026 (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 has eased since, standing at 1.1% in February 2026. Looking at capital value performance over three months rather than 12 confirms a clear loss of momentum, with growth over the three months to February 2026 at just 0.2%, down from a recent peak of 1.3% in December 2024. On this basis, the annual rate is likely to remain low.

• Capital growth performance varies considerably across the main commercial property sectors. Industrial is outperforming the all-property average, with annual growth to February 2026 standing at 2.7%. In contrast, office capital values are still falling on an annual basis, at -2.5% over the 12 months to February 2026, although performance is continuing to improve. Retail capital growth is currently between industrials and offices at 1.6%.

• The all-property annual total return has remained firmly positive since early 2024 but has moderated more recently, easing to 6.9% in February 2026, according to the MSCI Monthly Index. Performance continues to vary between sectors: retail remains the strongest performer at 8.6%, followed by industrial at 7.8%, while offices continue to underperform the all-property average, with annual total returns of 2.8%.

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. However, interest rate expectations have become more uncertain. Renewed geopolitical tensions in the Middle East and the risk of higher energy prices could sustain inflationary pressures, potentially delaying the pace at which the Bank of England is able to reduce interest rates and slowing the recovery in investment activity.

• 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.