Commercial Market Outlook

Overview

• The Budget has 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 has drawn on a broad range of revenue-raising measures, several of the scenarios widely discussed in the market did not materialise. This will come as a relief for many parts of the commercial property sector.
• Global economic conditions remain steady, with the IMF’s October 2025 Outlook projecting growth of 3.2% in 2025 and 3.1% in 2026, supported by improved financial conditions and stabilising global trade dynamics.
• In the UK, the latest ONS figures show that GDP grew by only 0.1% in Q3, following 0.3% in Q2. Annual growth stands at 1.3%, supported by increases in services and construction, while production output declined. GDP per head showed no growth over the quarter but is 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 1.2%.
• Labour market conditions are softening, with unemployment edging higher and wage growth slowing. Inflation continues to ease, and CPI fell to 3.6% in October, down from 3.8% in September. Treasury consensus forecast expects CPI to average 3.5% in Q4 2025, before gradually moving closer to the 2% target during 2026.
• The Bank of England held Bank Rate at 4.0% at its November meeting in a closely split vote, with several MPC members favouring a reduction. This indicates that support for further easing is building, although the Committee continues to emphasise a cautious, data-driven approach. 
• Monthly indicators point to an uneven performance across the economy. Manufacturing remains weak, although conditions are starting to stabilise, while services activity continues to grow at a modest pace. Construction remains under pressure, with firms reporting a sustained decline in workloads. Many businesses continue to face elevated input costs and cautious demand, reinforcing the sense of a challenging operating environment.

Recent output trends and indicators

• September’s monthly GDP is estimated to have fallen -0.1% over August, following August’s (downwardly revised) zero growth. Production output fell by -2.0%, largely driven by a fall in the manufacture of motor vehicles amid cyber incidents which paused production at Jaguar Land Rover. Both the services and construction sector output figures showed growth of 0.2%.
• October’s manufacturing PMI (S&P Global) rose to 49.7 from 46.2 in September and marks the highest level since October 2024, but was still in contraction (below 50). Production rose for the first time in 12 months amid restocking and importantly, the restarting of operations at Jaguar Land Rover. Output levels grew while investment goods production fell at a slower pace. New orders and exports however fell again owing to weak demand from abroad, and employment fell for the 12th straight month.
• The UK Services PMI also rose in October, moving to 52.3 from 50.8 in September. Firms noted an increase in domestic demand despite continued business uncertainty. There was notable postponement of spending plans ahead of the Budget and new work from international orders fell for the second month. Employment levels also fell although this was at the slowest rate in a year.
• Finally, the construction sector PMI declined in October, down to 44.1, the tenth month in a row of contraction. This is also the lowest rate since the COVID pandemic. Respondents reported poor market conditions and fewer tender opportunities, and employment in the sector fell at its fastest pace in over five years. Civil engineering work plummeted but declines were also reported in commercial and residential construction activity.

Labour market

• The UK unemployment rate increased to 5.0% in the three months to September, the highest level since May 2021. The employment rate edged down 0.1% to 75.0% as total employment fell by 22,000 during the quarter. This is the first decline since Q1 2024. 
• Estimates for the number of payrolled employees for October indicate a fall of around 32,000 over September and 180,000 over the year. Again, these should be treated as provisional and are likely to be revised when more data are available next month. The biggest fall in employees was from the wholesale and retail sector.
• The estimated number of job vacancies in the UK shows a largely unchanged figure over the quarter, with early estimates indicating a small increase of around 2,000. If this figure is not revised this would mark the first quarter in over three years where vacancies have not declined. 
• UK employees’ average earnings (excluding bonuses) rose 4.6% year on year, easing slightly from 4.7% the month before and marking the weakest regular pay growth since April 2022. Private sector wages slowed to 4.2%, their lowest since late 2021 while public sector wages increased to 6.6%, the steepest rise in that sector since 2023.

Inflation

• Annual CPI inflation eased to 3.6% in October, the lowest level in four months, down from 3.8% in each of the last three months. Prices slowed for housing and household services, largely due to the downward effect of gas and electricity prices from a change in the energy price cap in October. Smaller price rises were also found in restaurant and hotels as well as services, clothing and footwear. Upward pressure on the rate this month came from food and non-alcoholic beverages as well as recreation and culture.
• Core CPI (CPI excluding energy, food, alcohol and tobacco) was 3.4% in the 12 months to October 2025, down from 3.5% in the 12 months to September; the CPI goods annual rate fell from 2.9% to 2.6%, while the CPI services annual rate fell from 4.7% to 4.5%.
• The Bank of England had anticipated a peak in CPI inflation of around 4.0% in September; however, inflation ultimately came in slightly lower at 3.8%, before easing further to 3.6% in October. CPI is still expected to moderate gradually towards the 2% target over the medium term. The latest HM Treasury consensus forecast has 2.3% by Q4 2026, and the Office for Budget Responsibility has an average of 2.5% for 2026.

Interest rates

• The Bank of England’s Monetary Policy Committee (MPC) voted 5-4 to keep Bank Rate at 4.0% at its November meeting. The four members who voted against preferred a 25bps cut, suggesting there is growing support for easing the rate going forward. The next meeting of the MPC is scheduled on 18 December.

Retail occupier market

• October’s retail sales volumes figures show a fall of -1.1% over the month, following a +0.7% rise in September (upwardly revised). This is the first monthly fall since May 2025, with some retailers reporting that consumers may have been delaying their spending in the lead up to the usual Black Friday sales in November. Supermarket sales dropped for the second consecutive month while clothing stores also saw lower sales volumes. 
• GfK’s Consumer Confidence Index fell two points to -19 in November. All measures fell compared with October’s results. The Major Purchase Index fell by three points to -15 while the forward-looking measures of Personal Financial Situation and General Economic Situation both declined two points. The downbeat mood suggests consumers were feeling nervous ahead of the Budget.
• 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 2.5% in October 2025, compared with 0.9% a year ago, and the second-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 3.4% in October 2025 (MSCI Monthly Index). Over the three months to October 2025, the rate of increase accelerated sharply to 0.9%, the equivalent of 3.8% over one year, slightly ahead of the actual annual rate.
• Average rental value growth in the retail warehouse subsector was 2.9% in the 12 months to October 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 October 2025), the annual equivalent of 4.0% (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, where it has broadly held steady, currently standing at 1.9% in October. During the three months to October, rental growth was 0.6%, equivalent to an annualised rate of 2.5%.

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 peaked at 2.8% in March 2024, and has since fluctuated within a band between 2.1% and 2.6% per annum. The latest figure (October 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 5.3% in October 2025. Although the City of London continues to experience much weaker rental growth, it is gaining momentum, with a 3.1% annual rate in October 2025, the highest rate since February 2017 (MSCI Monthly Index).
• The rest of the south east recorded average annual office rental growth of just 0.9% in October 2025. Growth in the regional markets is stronger at 2.5% (MSCI Monthly Index).

Industrial occupier market

• Although letting activity has been relatively subdued in recent months, 2025 has seen some significant lettings, including M&S taking 1.3 million sq ft for its National Distribution Centre at Daventry International Rail Freight Terminal, and GXO Logistics taking 880,000 sq ft at Panattoni Park, 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 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 4.5% in October 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 250 basis points at the end of November 2025. More recently, gilt yields have eased slightly, from around 4.7% earlier in the month to approximately 4.4% at the end of November (following the Budget), the lowest level since late 2024.
• 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 October 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 October 2025, standing at 2.2%.
• Looking at capital value performance over three months rather than 12 confirms a loss of momentum, with growth during the three months to October standing at 0.2%, 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 October 2025 standing at 4.3%. In contrast, office capital values are still falling on an annual basis, at -2.1% over the 12 months to October 2025, although performance is continuing to improve. Retail capital growth is currently between industrials and offices at 2.6%.
• 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 broadly steady at 8.1% in October. By sector, industrial and retail stand at 9.4% and 9.9% respectively, while offices continue to lag the all-property average at 3.2%.