Commercial Market Outlook

• The UK economy has again exhibited a mix of positive and negative signals. While Q1 2025 saw stronger-than-expected GDP growth of 0.7%, April data revealed a surprising 0.3% contraction, the largest monthly drop since October 2023. This downturn was primarily driven by a fall in the services sector, likely due to recent business tax changes (national insurance contributions) and global trade disruption.

• Retail sales volumes fell at their strongest rate in over 18 months in May, although consumer confidence edged up. Meanwhile, the latest S&P Global PMIs for UK services, manufacturing, and construction all improved, although only the services PMI is in expansion territory.

• Annual CPI inflation remained above target at 3.4% in May, unchanged from the restated April figure. However, the ‘core’ and services CPI measures fell in May, both of which are closely watched by the Bank of England’s Monetary Policy committee (MPC).

• The MPC maintained interest rates at 4.25% at its June meeting. However, further cuts are likely this year, despite CPI inflation remaining well above the Bank’s 2% target rate. The MPC noted the underlying weakness of UK GDP growth and that the labour market has continued to loosen.

• UK economic growth will remain weak this year and next. The latest Treasury-compiled consensus forecast (June) is for below-trend growth of 1.1% in 2025, in line with the Bank of England’s view. Growth this year should therefore be similar to that seen in 2024, and is expected to continue at broadly the same rate in 2026 (the Treasury-compiled consensus suggests 1.0%).

Recent output trends and indicators

• Monthly GDP is estimated to have fallen by -0.3% in April, down from growth of 0.2% the month before. This decline was primarily driven by a -0.4% fall in services output, which is the largest component of the UK economy. Production output also declined, by -0.6%, while construction grew by 0.9%. Despite the monthly dip, GDP for the three months to April is still estimated to have grown by 0.7%.

• The S&P Global UK Services PMI remained in expansion in June, rising to 51.3 from 50.9 in May. This marks the fastest rate of services growth in three months and was supported by an uptick in new business volumes, particularly from domestic clients. However, cost pressures and staffing challenges persisted, with companies continuing to report difficulty recruiting and retaining skilled staff. Business expectations remained positive overall but softened slightly due to ongoing concerns around the broader economic outlook.

• The UK Manufacturing PMI for June rose a little over May to 47.7 (from 46.4), a five-month high, but clearly remains very much in contraction territory. Output declined as manufacturers reduced production in various areas due to weakening demand both domestically and internationally. This is mainly attributed to the impact of US tariffs, rising geopolitical uncertainty and intense price competition in major global markets.

• The UK Construction PMI rose again in May to 47.9, up from 46.6 the previous month. This marks the third consecutive month of improvement, although the index remains in contraction territory. While new order output fell slightly, business confidence reached its highest level since December 2024. Conversely, the pace of job losses accelerated at its fastest rate since August 2020. Residential work continues to be the worst-performing sub sector, while commercial activity saw a slight decline. Input cost inflation across the sector remained elevated, though not as high as in March.

Labour market

• The unemployment rate rose again in April, reaching 4.6%, its highest level in nearly four years. Total employment was marginally higher at 75.1%, up from 75.0% the month prior. The number of payrolled employees declined by 55,000 between March and April, and early estimates for May suggest a further monthly fall of 109,000. Job vacancies continued their downward trend, falling for the 35th consecutive quarter.

• Annual growth in employees’ average regular earnings (excluding bonuses) was 5.2% in the three months to April, down slightly from 5.6% last month. Once again, the wholesaling, retailing, hotels and restaurants sector saw the strongest growth rate, followed by the construction sector.

Inflation

• CPI inflation was 3.4% in the 12 months to May, matching consensus expectations. Downward pressure came from transport prices and the cost of housing and household services, while the largest upward contribution came from an increase in food and non-alcoholic beverages. On a monthly basis, inflation rose by 0.2%.

• Core CPI (excluding volatile elements such as energy and food) rose at 3.5% in the 12 months to May, down from 3.8% in April. The annual services CPI rate slowed from 5.4% to 4.7%.

• All-items CPI looks set to remain above 3% for the rest of this year. The Bank of England expects CPI of 3.5% in Q3 (marginally above the current rate), falling slightly to 3.3% in Q4, and falling further towards the target rate in 2026, reaching 2.1% by Q4 next year. The latest consensus forecast (June) expects CPI of 3.1% in Q4 2025 and 2.3% in Q4 2026.

Interest rates

• The Bank of England’s Monetary Policy Committee (MPC) maintained interest rates at 4.25% at their June meeting. A majority of 6–3 voted to maintain Bank Rate, whilst three members preferred a reduction of 0.25 percentage points.

• Further monetary loosening is likely this year, despite CPI inflation remaining well above the Bank’s 2% target rate. The MPC noted that underlying UK GDP growth remains weak and the labour market has continued to loosen, leading to clearer signs that a margin of slack in the economy has opened up. It signalled a gradual and careful approach to base rate reductions. The next MPC decision is scheduled for publication on 7th August.

Retail occupier market

• Retail sales volumes fell sharply by -2.7% in May, the steepest monthly decline since December 2023. This was largely due to a -5.0% drop in food store sales, while non-food sales declined by -1.4%. In contrast to April’s weather-boosted rise, the May figures suggest that consumers remain cautious amid broader economic pressures.

• The GfK consumer confidence index showed some modest improvement, rising by two points in June, although it remains negative at -18. Of the five sub-measures, two increased while three remained unchanged. The strongest increase came from the Economic Situation looking ahead, which saw a five-point increase. However, at -28 overall, it is still strongly negative and well down from the same month last year (-11). The Major Purchase Index metric was unchanged at -16 but above -23 at the same time last year.

• The Q1 2025 RICS UK Commercial Property Survey shows a net balance of -13% for retail occupier demand, down from -12% in Q4 2024, 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 1.9% in May, compared with 0.9% a year ago, and the highest rate since 2008 (MSCI Monthly Index).

• The all-retail trend masks significant variation, depending on the type of property and location. Average rents for standard (high street) shops have been rising since May 2023, with the annual rate accelerating to 1.4% in May 2025 (MSCI Monthly Index). Over the three months to May 2025, the increase was 0.6%, the equivalent of 2.4% over one year, ahead of the actual annual rate.

• Average rental value growth in the retail warehouse subsector was 2.5% in the 12 months to May 2025, up from a recent low of 0.6% per annum in June 2023, although down slightly from a recent peak of 2.7% in April. On a quarterly basis, growth stands at 0.4% (three months to May 2025), the annual equivalent of 1.6% (MSCI Monthly Index).

• The annual rate of average rental growth for UK shopping centres finally turned positive at the start of this year and has accelerated quite rapidly, reaching 2.0% in April, and remaining at this rate in May. During the three months to May, 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 Q1 2025 RICS UK Commercial Property Survey continues to show a positive net balance for office occupier demand at +6%, up a little from +3% in Q4 2024, and close to the recent high of +7% in Q2 2024. This suggests that demand has broadly stabilised at a robust level, 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 (May 2025) is 2.2%.

• Average annual rental growth in the West End / Midtown submarket has decelerated from a peak of 6.7% in July 2024, but remains strong at 5.5% in May 2025. The City of London continues to see a much lower rate of growth, at 1.3% per annum in May 2025, a figure that has fluctuated between 0.8% and 1.3% over the past six months (MSCI Monthly Index).

• The rest of the south east recorded average annual office rental growth of just 0.6% in May 2025, whilst growth in the regional markets is stronger at 2.5% (MSCI Monthly Index).

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 B&M taking 670,000 sq ft in Ellesmere Port.

• 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 and further rises in real household income boosting consumer demand. Supply chains will continue to evolve, and we expect to see more retailers outsource 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 Q1 2025 RICS UK Commercial Property Survey continues to show a positive reading for industrial occupier demand, with a net balance of +9%, up from +7% in Q4 2024. This is above the recent low of +3% in Q3 2023, although still well below the peak of +49% in Q2 2022.

• Vacancy rates have been rising over recent quarters, due to a combination of slowing demand and rising supply, with a number 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 5.3% in April 2025, still well above general inflation.

• The Q1 2025 RICS UK Commercial Property Survey reported a net balance of +50% expecting prime rents to rise over the next 12 months, a continued strong reading, but marginally down from +55% in Q4 2024.

Transaction volumes

• Investment in UK commercial property eased across all major sectors in Q1 2025, with a total of £9.3bn traded. This represented a 40% decline quarter-on-quarter and was 30% below the five-year quarterly average, but broadly in line with volumes recorded in Q1 2024. £53.5bn has been traded over the 12 months to Q1 2025, 15% below the five-year average. 

• The alternative sectors accounted for the largest share of the quarterly total, at 39%. The industrial sector accounted for 19%, and offices amounted to 26%, the second highest share. None of the main sectors recorded volumes above the five-year quarterly average. 

• Overseas investment in UK commercial property totalled £4.5bn in Q1 2025, accounting for 48% of total investment, broadly in line with the 10-year average. US investors retained the largest share of overseas investment in Q1 at around £1.6bn, but notably below the £4.3bn spent in the previous quarter. European investors had another strong quarter, ranking second with close to £720m invested.

Recent investment performance

• Following a sustained period of upward movement from mid-2022 to the end of 2023, overall commercial property equivalent yields have been broadly flat over the last 12 months at circa 7.1% (MSCI Monthly Index).

• In contrast, 10-year gilt yields continued to move upwards in the second half of 2024, although they have been somewhat more stable so far in 2025, within a range between 4.4% and 4.9%, currently standing at 4.45% (26th June).

• These trends have 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 240 basis points at the end of May 2025.

• Average all-property rental values have been rising consistently at a rate of over 3% per annum since February 2022, averaging 3.6% per annum over the last three years. The rate of growth stood at 3.4% per annum in May 2025 (MSCI Monthly Index).

• With the broad stabilisation of property yields, annual all-property capital growth performance improved rapidly, turning positive at the end of 2024, and rising to +2.7% by May 2025, compared with a low of -21.2% in mid-2023. However, there has been some loss of momentum in recent months. Capital growth over the three months to May stood at 0.5%, down from a peak of 1.3% in December 2024.

• Capital growth performance varies considerably across the main commercial property sectors. Industrial and retail are outperforming the all-property average, with annual growth to May 2025 standing at 5.2% and 3.6% respectively. In contrast, office capital values are continuing to fall on an annual basis, at -2.3% over the 12 months to May 2025, although performance is continuing to improve.

• The all-property annual total return was in positive territory throughout 2024 and has accelerated to +8.7% by May 2025 (MSCI Monthly Index). The industrial annual total return is now +10.5%, with retail at a similar +11%, and offices well below the all-property average at +3.1% (MSCI Monthly Index).

Investment outlook

• The immediate volatility witnessed in the days following President Trump's global tariff statement has calmed down, helped by June’s limited trade deal with the UK. Investors are now waiting to see how the market will react once the global 90-day pause ends on 8th July. Understanding the full impact of any tariffs that are imposed (assuming they are not further delayed) will take time.

• Companies will further delay investment decisions, and in the short to medium term there is a higher risk that this will negatively impact the occupational market. As a result, investors are assessing risk and pricing even more cautiously than before. This may mean lower volumes of assets coming to the market, as investors who can afford to will again choose to “wait and see” how the market reacts. 

• Despite ongoing uncertainty, there are reasons for optimism. Recent base rate reductions, alongside expectations of further cuts by year-end, may help to counteract some of the economic headwinds and recent geopolitical turbulence, and support renewed activity. Lower borrowing costs, coupled with potentially reduced competition, mean the remainder of this year could offer attractive opportunities, particularly for investors targeting value-add and core-plus strategies.