Commercial Market Outlook

• GDP growth of 0.7% in Q1 was a welcome ‘good news boost’ during an otherwise uncertain period. Higher US tariffs and ongoing US policy uncertainty will undoubtedly reduce global economic growth this year. However, the impact on the UK will be cushioned by the tariff being set at the ‘baseline’ 10% rate, together with some positive impacts from the government’s recent limited trade deal, and the relatively low proportion of UK exports accounted for by US-destined goods. The 90-day pause on global ‘reciprocal’ US tariffs above the 10% baseline is set to expire on 8 July.

• The strong UK economic growth experienced in Q1 is not likely to persist. The latest Treasury-compiled consensus forecast (May) is for below-trend economic growth of 1.0% in 2025, in line with the Office for Budget Responsibility’s forecast produced for the Spring Statement and the Bank of England’s view. Growth this year should therefore be similar to that achieved in 2024 (1.1%), and is expected to continue at broadly the same rate in 2026 (the Treasury-compiled consensus suggests 1.1%).

• Inflation has risen to its highest rate since January last year, with annual CPI jumping to 3.5% in April, reflecting the impact of increasing household bills. However, inflation looks set to peak relatively soon as recent reductions in wholesale energy prices should feed through to utility bills from July. Indeed, the Bank of England expects CPI to start falling from Q4 (forecast at 3.3%), and to continue moving back towards its target rate in 2026, reaching 2.1% by Q4 next year.

• That said, the inflation outlook is particularly uncertain. Upward pressure is coming from April’s rise in the National Living Wage and Employers' National Insurance Contributions (the impact of which is difficult to predict) as well as above-inflation wage growth. Conversely, recent gains in the value of Sterling against the US Dollar should have a downward effect. The impact of US tariffs is also difficult to judge, as it could help to ease inflation (if, for example, exports from Asia that were previously destined for the US are ‘dumped’ in European markets), or to raise inflation (if supply chains are disrupted, or global manufacturers spread the cost of US tariffs across all markets).

• The Official Bank Rate was cut by 25 basis points to 4.25% in May, its lowest level since April 2023. We expect further reductions this year, given the expected fall in inflation next year (looking beyond the current short-term acceleration) and the subdued outlook for growth. The May Consensus forecast suggests that either one or two further 25-basis point cuts is likely.

Recent output trends and indicators

• The first estimate of Q1 GDP growth showed the UK economy expanding by a strong 0.7%, up from 0.1% in the previous quarter. This represents the strongest rate of growth since Q1 2024. The services sector grew at 0.7%, and the production sector saw a 1.1% increase following three consecutive quarterly declines, but construction output saw no change. On a monthly basis GDP increased by 0.2% in March following 0.5% the month before.

• The S&P Global UK Services PMI moved into contraction territory in April, falling from a strong 52.5 in March to 48.9. This also ended a run of 17-months of expansion for the sector. New orders and employment both fell, with subdued domestic demand being blamed on the negative impact of US tariffs. Inflation rose quickly across both input and output costs while business expectations on future activity weakened.

• The UK Manufacturing PMI for April rose a little over March to 45.4 (from 44.9), but clearly remains very much in contraction territory. Output declined as manufacturers decreased production in a variety of areas due to weakening demand both domestically and internationally. Rising economic and trade uncertainty is almost entirely to blame for this fall. Employment fell at the second-steepest rate in almost five years, input costs rose at their fastest pace since December 2022, and business confidence deteriorated to a 29-month low.

• The S&P Global UK Construction PMI rose slightly in April to 46.6, up from 46.4, although still the fourth consecutive month of contraction. This month saw further new order declines as business uncertainty delayed projects. All three sub-sectors were below ‘50’ with commercial work falling sharply to 45.5, while residential work showed its mildest decline this year, with a reading of 47.1. Purchasing activity fell at the fastest rate in five years amid rising material and pay costs.

Labour market

• April’s unemployment rate moved up to 4.5% from 4.4% in March, according to the latest Official Labour Force Survey. The total employment rate fell to 75.0% from 75.1% in the previous reading.

• Early estimates suggest the total number of payrolled employees fell by 33,000 during April and by 106,000 over the year. Job vacancies fell by 43,000 in the three months to April, the 34th consecutive quarterly fall, to put total vacancies at 761,000. Vacancies are now 34,000 below their pre-pandemic January - March 2020 level and have seen a 41% fall from 1.3 million vacancies recorded during the same period three years ago.

• Annual growth in employees’ average regular earnings (excluding bonuses) was 5.6% in the three months to March, down slightly from 5.9% last month. Once again, it was the wholesaling, retailing, hotels and restaurants sector which saw the strongest growth rate, followed by the construction sector.

Inflation

• CPI inflation jumped to 3.5% in the 12 months to April, up from 2.6% in March, and higher than consensus expectations of 3.3%. Price increases from household bills including utilities (following Ofgem’s new energy price cap from April) placed the strongest upward pressure on inflation, although a strong upward contribution also came from rising transportation costs. Discounting across clothing and footwear helped contribute to some downward pressure during the month.

• Core CPI (excluding volatile elements such as energy and food) rose at 3.8% in the 12 months to April, up from 3.4% in March. The annual services CPI rate rose from 4.7% to 5.4%.

• 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 (the same as 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 (May) expects CPI of 3.0% in Q4 2025 and 2.3% in Q4 2026.

Interest rates

• The Bank of England’s Monetary Policy Committee (MPC) reduced the base rate by 25 basis points to 4.25% at its May meeting, marking the fourth reduction from a peak of 5.25%, and the second cut of 2025. A majority of 5–4 voted for a 25-basis point cut, with two members preferring to reduce Bank Rate by 0.5 basis points (to 4.0%) and two preferring to maintain Bank Rate at 4.5%.

• Further cuts to the base rate are likely this year, despite this month’s sharp rise in inflation. The MPC notes an expected slowing of wage inflation as the labour market cools, a broader easing of supply-side pressures, a weaker outlook for global (and to a lesser extent UK) GDP growth, and also that it views the overall impact of global US tariffs on the UK as more likely to be disinflationary than inflationary (but with significant uncertainty). In addition, wholesale energy prices have fallen recently, and this should start to feed through to lower bills when Ofgem’s energy price cap is reviewed in July. The next MPC decision is scheduled to be published on 19 June.

Retail occupier market

• Retail sales volumes rose by 1.2% in April 2025, following a rise of 0.1% in March (revised down from 0.4%). Volumes rose by 1.8% in the three months to April, when compared with the three months to January. The amount spent online fell by 0.3% during April, but rose by 6.1% when comparing April 2025 with April 2024, and by 3.4% when comparing the three months to April 2025 with the three months to January 2025.

• The monthly GfK Consumer Confidence Index rose by 3 points to -20 in May, driven by greater optimism on both the economy and personal finances. This largely reversed April’s decline, which was driven by tariff concerns, but the index remains well into negative territory, and well below the long-term average.

• 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, reaching 2.0% in April, compared with 0.8% 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 1.3% in April 2025 (MSCI Monthly Index). Over the three months to April 2025, the increase was 0.5%, the equivalent of 2.1% over one year, ahead of the actual annual rate.

• Average rental value growth in the retail warehouse subsector has continued to accelerate, reaching 2.7% in the 12 months to April 2025, up from a recent low of 0.6% per annum in June 2023. On a quarterly basis, growth stands at 0.6% (three months to April 2025), the annual equivalent of 2.4% (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. During the three months to April, rental growth was 0.7%, the annual equivalent of 2.6%.

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 (April 2025) is 2.1%.

• 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 4.7% in April 2025. The City of London continues to see a much lower rate of growth, at 1.2% per annum in April 2025, a figure that has fluctuated between 0.8% and 1.3% over the last six months (MSCI Monthly Index).

• The rest of the south east recorded average annual office rental growth of just 0.8% in April 2025, whilst growth in the regional markets is somewhat stronger at 2.4% (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 yields have been broadly flat over the last 12 months. There was some very modest downward yield movement at the end of last year, followed by some modest upward movement over the last three months, according to the MSCI Monthly Index.

• In contrast, 10-year gilt yields have moved upwards since last September and currently stand at 4.75% (23 May). These trends have resulted in a narrowing of the gap between property and gilt yields from circa 350 basis points at the start of 2024 to circa 260 basis points at the end of April 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 April 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 +2.6% by April 2025, compared with a low of -21.2% in mid-2023. However, there has been some loss of momentum in recent months, in line with a very modest upward shift in yields. Capital growth over the three months to April 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 April 2025 standing at 5.2% and 3.9% respectively. In contrast, office capital values are continuing to fall on an annual basis, at -2.8% over the 12 months to March 2025, although performance is continuing to improve.

• The all-property annual total return was in positive territory throughout 2024, and has accelerated to +8.6% by April 2025 (MSCI Monthly Index). The industrial annual total return is now +10.5%, with retail at a similar +11.3%, and offices well below the all-property average at +2.6% (MSCI Monthly Index).

Investment outlook

• The immediate volatility witnessed in the days following President Trump's global tariff statement has, to some degree, calmed down. Investors are now waiting to see how the market will react once the 90-day pause is over. Understanding the full impact of any tariffs that are imposed (assuming they are not further delayed) will take time as the global trading ecosystem unravels. 

• 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 will be 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. The Bank of England’s decision to reduce the base rate from 4.5% to 4.25%, alongside expectations of further cuts by year-end, may help to counteract some of the economic headwinds 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.