Commercial Market Outlook

Overview

• The global economy continues to face a challenging and uncertain outlook, shaped by the prolonged conflict in the Middle East. In its July World Economic Outlook update, the IMF projected global GDP growth of 3.0% in 2026 and 3.4% in 2027, with investment in artificial intelligence and technology partly offsetting the effects of higher energy prices. These projections assumed a gradual easing of energy supply disruption, and the persistence of the conflict leaves considerable uncertainty around the outlook for growth and inflation.

• The UK economy has shown firmer momentum, with GDP growing by 0.4% in July, supported by an expansion in services output. August business surveys also pointed to continued growth in services and manufacturing, although construction remained weak. These indicators suggest that activity has held up relatively well, but higher energy costs and restrictive financing conditions continue to weigh on household spending and business investment, limiting the scope for a sustained acceleration.

• Growth expectations have improved modestly. The September consensus of independent forecasts compiled by HM Treasury points to UK GDP growth of 1.2% in both 2026 and 2027, up from 1.1% for each year in August. The 2026 forecast is slightly above the IMF’s July projection of 1.0% and the OBR’s March forecast of 1.1%. Nevertheless, the outlook remains one of modest expansion, with elevated borrowing costs and geopolitical uncertainty continuing to constrain growth prospects.

• Labour market conditions continue to ease gradually. Unemployment remained at 4.9% in the three months to July, while vacancies and payrolled employment continued to fall. Regular earnings growth was stable at 3.5%, suggesting limited additional pressure from wages. The September Treasury consensus expects unemployment to reach 5.1% in Q4 2026, slightly below the 5.2% forecast in August. A softer labour market should help contain domestic inflationary pressures, but may also restrain consumer spending.

• The inflation outlook has become less favourable, with headline CPI rising to 3.1% in August, driven principally by higher motor fuel costs, while core and services inflation were unchanged. The September Treasury consensus expects inflation of 3.4% in Q4 2026, up from 3.3% in August, before easing to 2.3% by Q4 2027. However, the path back towards target remains uncertain, as energy price volatility and continued supply disruption could keep cost pressures elevated for longer.

• The Bank of England held Bank Rate at 3.75% in September, with three MPC members voting for an increase to 4.0%. The policy outlook remains sensitive to inflation and the duration of energy supply disruption, with further tightening possible if higher costs feed through into wider prices and wages. Elevated and volatile government bond yields also continue to keep financing conditions challenging for commercial property, limiting the prospect of a sustained easing in borrowing costs.

• Overall, stronger activity and modestly improved growth forecasts provide some support for the commercial property outlook, but higher inflation risks and elevated borrowing costs continue to limit the recovery. Resilient economic activity should help sustain occupier demand, while expensive debt and attractive bond yields may constrain investment activity and capital value growth. The backdrop continues to favour assets with secure income and sustainable rental growth, with performance likely to vary by sector, location and building quality.

Recent output trends and indicators

• Monthly GDP grew by 0.4% in July, following a rise of 0.3% in June and well above market expectations of no growth. The largest upward contribution came from a 0.4% rise in services, but there were also increases recorded across production (0.2%) and construction (0.1%). On an annual basis, GDP expanded by 1.6%, the strongest year-on-year rise since February 2025.

• The S&P Global UK Manufacturing PMI dipped to 51.7 in August, down very slightly from 51.9 the month before. Output rose for the fifth month, and new orders also grew both domestically and internationally. All of this led to employment in the sector expanding at its fastest rate in two years/ Optimism about the year ahead also rose to a six-month high.

• The Services PMI rose to 52.5 in August, from 52.1 in July, marking its highest reading in four months. New orders increased modestly, although export sales fell for the sixth consecutive month as demand from Europe weakened. Employment growth slowed to its weakest pace in ten months, while input cost inflation edged higher. As in the construction sector, optimism within the services industry strengthened for the third consecutive month.

• Meanwhile, the Construction PMI eased to 44.3 in August, from 44.7 the month before. The fall was led by a sharp weakening in residential building work, which saw its index fall to 37.6. The commercial and civil engineering indices also fell, but not as sharply as residential. Respondents noted a fall in new order intakes and low client confidence, while anecdotally, risk aversion seems to have risen with the Middle East conflict dragging on. Having said that, input price inflation eased to its lowest since February and supply chain performance was stable.

Labour market

• For the fourth consecutive period, the UK unemployment rate was unchanged at 4.9% in the three months to July. The number of unemployed people rose by 11,000 over the previous quarter, driven by a rise in those unemployed for more than six months. The employment rate also remained unchanged at 75.1% as the total number of employed people increased by 66,000 over the previous three-monthly period.

• The estimated number of job vacancies in the UK between June to August, decreased by 8,000 to 702,000, compared with March to May. This is the lowest number of job vacancies since August to October 2014 (outside of the pandemic period). The number of payrolled employees, meanwhile, fell by 101,000 over the year to July, and decreased 19,000 monthly. The early estimates for August’s payroll figures suggest another monthly fall of 26,000. This figure should be treated with caution as it is provisional and will likely be revised.

• The annual growth in employees’ average regular earnings (excluding bonuses) was 3.5% in the May to July period, marking no change over the previous three-monthly period. This figure has also been relatively stable now for each of the last five consecutive three-month periods, where it has hovered around either 3.4% or 3.5%.

Inflation

• CPI inflation rose to 3.1% in the 12 months to August, the highest in five months and up from 2.9% in July. Transport costs, particularly motor fuel, contributed the largest upward movement, increasing 23.0% over the year. Other sectors also saw price increases including housing and household services, communication and recreation and culture. Food inflation remained unchanged at 1.3%.

• Core CPI (CPI excluding energy, food, alcohol, and tobacco) rose by 2.6% in the 12 months to August 2026, unchanged from the 12 months to July; the CPI goods annual rate rose from 2.2% to 2.7%, while the CPI services annual rate was unchanged, at 3.4%.

Interest rates

• The Bank of England’s Monetary Policy Committee (MPC) held the Bank Rate at 3.75% for the sixth time in a row. The Committee was split 6-3 in the decision with three members opting to raise the rate to 4%.

Retail occupier market

• Retail sales are estimated to have risen by 0.5% in August (by volume), following a 0.5% decline in July. Non-store retailers saw sales increase by 1.7%, while non-food store sales rose by 0.6%. Food store volumes also increased, supported by higher spending in supermarkets. On a three-month basis, retail volumes grew by 0.9%, driven by higher alcohol and beverage sales linked to promotions, warmer weather, and the World Cup.

• Consumer confidence, as measured by the GfK Consumer Confidence Index, rose by three points to -14 in August. This represents the highest reading in two years and is well above the -25 recorded just four months earlier in April. Four of the five sub-indices increased, including the Major Purchase Index, which rose by five points to -7, and the forward-looking General Economic Situation Index, which also increased by five points to -23. This marks its strongest reading since August 2024, albeit still firmly negative.

• The Q2 2026 RICS UK Commercial Property Survey reports a net balance of -16% for retail occupier demand, improving from -19% in Q1 and -21% in Q4 2025. Despite this gradual improvement, sentiment remains subdued and retail continues to record the weakest occupier demand reading across the main sectors.

• 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 strengthened through most of 2025, rising from 1.7% in January to peaks of 2.6% in September and November. Growth moderated at the end of 2025 and fluctuated between 1.7% and 2.0% during the first half of 2026. Annual rental value growth stood at 1.6% in August, indicating a softer pace of growth compared with the first half of the year (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, according to the MSCI Monthly Index. However, momentum reversed sharply towards the end of the year, with rental values declining on an annual basis from December. Rents have remained under pressure in 2026, although the annual rate of decline eased slightly from 3.7% in July to 3.4% in August.

• Average rental values in the retail warehouse subsector increased by 2.5% in the 12 months to August 2026, down from 2.9% in July. Growth has moderated from its recent peak of 3.4% in November 2025, with August recording the slowest annual increase since June 2025 (MSCI Monthly Index).

• Annual rental value growth for UK shopping centres has remained broadly stable in recent months, easing slightly to 1.6% in August 2026 from 1.7% in July. Over the three months to August, rental values increased by 0.5%, matching the rate recorded in the three months to July and equivalent to an annualised rate of 1.9% (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 remains focused on buildings that are sustainable and energy efficient, as businesses seek to meet their ESG objectives while reducing occupational costs. The government's revised proposals for Minimum Energy Efficiency Standards (MEES) extend the implementation timetable but continue to signal a move towards higher environmental standards, with a minimum EPC rating of B proposed for larger privately rented non-domestic buildings from 2031.

• 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 Q2 2026 RICS UK Commercial Property Survey reports that office occupier demand remained slightly negative, with the net balance unchanged at -4% for a second consecutive quarter. While sentiment remains subdued, demand has shown little movement over the past year and continues to compare favourably with the more pronounced weakness seen during the immediate post-pandemic period.

• 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 2.8% in August 2026, easing slightly from the 3% recorded in July, but remaining above the levels observed earlier in 2025.

• In the West End / Midtown submarket, annual rental value growth has moderated from a peak of 8.4% in late 2025 to 4.8% in August 2026. Rental growth in the City of London also eased, falling to 3.0% from a recent peak of 3.8% in July, and remained below the West End / Midtown rate (MSCI Monthly Index).

• The rest of the South East recorded marginally negative annual office rental value growth of -0.5% in August 2026, reflecting continued weakness across the market. In contrast, annual rental value growth across the wider UK regional office market strengthened to 5%, underlining the continued divergence in performance between London-adjacent markets and the rest of the UK (MSCI Monthly Index).

Industrial occupier market

• Although letting activity has been relatively subdued compared to previous years, the first half of 2026 saw some significant lettings, including Bleckmann taking 761,000 sq ft in Lutterworth, and DHL taking 514,000 sq ft on an assignment at Derby Commercial Park.

• 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 Q2 2026 RICS UK Commercial Property Survey indicates a modest improvement in industrial occupier demand, with the net balance rising from -1% in Q1 to +3% in Q2. This return to positive territory points to resilient occupational demand despite a subdued wider market backdrop and continued macroeconomic and geopolitical uncertainty.

• 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 4.3% in August 2026, still above general inflation.

Transaction volumes

• A total of £10.9bn was invested in UK commercial property in Q2 2026, broadly unchanged from the previous quarter and in line with recent quarterly norms. Transaction activity remained subdued, with 351 deals completed during the quarter, marginally fewer than in Q1 and well below the level recorded a year earlier, suggesting that the improvement in investment volumes has been driven by a relatively small number of larger transactions rather than a broad-based recovery in deal activity. The rolling annual investment total increased to c.£49bn, its highest level since Q1 2023, bringing it broadly back in line with the five-year average. While this points to improving capital deployment, activity remains below the longer-term 10-year average, and the low number of transactions suggests market liquidity is still relatively constrained.

• Approximately 35% of Q2 investment was in London, in line with the five-year average, with overseas capital accounting for 46% of the total.

• In Q2 2026, alternative assets accounted for the largest share of UK investment activity at 55%. Offices followed at 23%, with industrial at 13% and retail assets at 9%. A pronounced divergence in sector performance persisted in Q2 2026. Investment volumes across the traditional commercial sectors remained below their respective five-year quarterly averages, with industrial (54% below), retail (47% below) and offices (25% below) continuing to lag historical norms. By contrast, alternatives outperformed, with volumes 43% above the five-year average, reflecting continued investor demand for sectors underpinned by resilient income characteristics and favourable long-term fundamentals.

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.

• Government bond yields remain elevated amid ongoing geopolitical tensions in the Middle East and renewed concerns that higher energy prices could place upward pressure on inflation. This has tempered expectations for the pace of further interest rate cuts and contributed to continued volatility across financial markets. While elevated bond yields continue to influence real estate pricing and investor sentiment, greater clarity over the geopolitical outlook and inflation trajectory would help improve confidence and support a broader recovery in transaction activity.

• Average all-property rental values have increased by more than 3% per annum since February 2022. Annual rental value growth eased slightly to 3.1% in August 2026, down from 3.2% in July (MSCI Monthly Index).

• Annual all-property capital growth has steadily weakened from a peak of 2.7% in summer 2025. Capital values fell by 0.1% in the 12 months to August 2026, compared with growth of 0.1% in July, marking a return to marginal annual declines (MSCI Monthly Index).

• Capital values declined by 0.1% over the three months to August 2026. The three-month rate of decline has remained unchanged since May, pointing to persistent but limited downward pressure on values (MSCI Monthly Index).

• Capital growth performance varies considerably across the main commercial property sectors. Retail is outperforming the all-property average, with annual growth to August 2026 standing at 1.5%. Office capital values remain negative on an annual basis, at -3.1% over the 12 months to August 2026, although the pace of decline has moderated substantially and appears to be stabilising. Industrial capital growth sits between retail and offices at 0.9%.

• The all-property annual total return has remained firmly positive since early 2024 but has moderated more recently, easing to 5.6% in August 2026, according to the MSCI Monthly Index. Performance continues to vary between sectors: retail remains the strongest performer at 8.4%, followed by industrial at 5.6%, while offices continue to underperform the all-property average, with annual total returns of 2.2%.

Investment outlook

• As we move into the second half of the year, uncertainty has once again moved to the forefront of investors' minds. Escalating tensions in the Middle East have increased volatility across global markets and raised concerns that higher energy prices could place renewed upward pressure on inflation. While UK interest rates are still expected to trend lower, a more uncertain inflation outlook may encourage the Monetary Policy Committee to adopt a more cautious approach to future rate cuts.

• The UK also enters a new political chapter following the appointment of a new Prime Minister, marking the latest change in national leadership after a prolonged period of political turnover. For property investors, political stability and policy certainty are often more important than the policies themselves. Markets can adapt to policy change, but periods of uncertainty typically delay decision-making, investment and transaction activity. The market will now be looking for greater clarity and consistency from the new government to help reinforce business and investor confidence.

• Seasonal factors are also expected to influence activity over the coming months. Transaction timetables are likely to lengthen as investors, lenders and advisers navigate the summer holiday period, although this appears to reflect timing rather than weakening appetite. Capital remains available, with investors continuing to target well-priced opportunities across sectors supported by strong occupational fundamentals and resilient income characteristics.

• Looking further ahead, pricing has broadly stabilised, financing conditions have continued to improve and investor confidence is gradually rebuilding. The office market remains polarised, with prime, ESG-compliant assets continuing to outperform while secondary buildings present selective value-add opportunities. Industrial and logistics fundamentals remain underpinned by healthy occupier demand, retail continues to attract renewed investor interest following significant repricing, and the living sectors remain supported by chronic housing undersupply and resilient rental growth.

• Although geopolitical risks are likely to remain elevated, the overall investment backdrop is more constructive than it was a year ago. For investors able to look beyond near-term volatility, opportunities continue to emerge across all major sectors, particularly where strong occupational fundamentals support sustainable long-term income growth.