Commercial Market Outlook

Overview

• The global economy continues to navigate a challenging environment, with heightened geopolitical tensions in the Middle East continuing to shape the outlook. The IMF forecasts global GDP growth of 3.0% in 2026 and 3.4% in 2027, as the negative effects of the conflict and higher energy prices are partly offset by continued investment in artificial intelligence and technology. While the global economy has proved more resilient than initially feared, downside risks remain tilted towards renewed energy price volatility, inflationary pressures and weaker business confidence.

• The UK economy continues to expand modestly, although momentum remains uneven. GDP growth has proved more resilient than expected in the first half of the year, but recent survey evidence points to softer activity across parts of the economy as businesses respond to heightened uncertainty and rising input costs. The outlook, therefore, remains one of modest expansion rather than a material acceleration.

• The medium-term outlook remains relatively restrained. The IMF expects UK GDP growth of 1.0% in 2026, in line with the latest HM Treasury consensus forecast, with growth remaining below its long-term trend rate as higher energy costs and tighter financial conditions continue to weigh on activity.

• Labour market conditions continue to ease gradually. Employment has remained relatively resilient, and unemployment has stabilised close to 5%, while vacancies have continued to trend lower and earnings growth has moderated. Labour cost pressures are therefore easing, although wage growth remains above levels consistent with the Bank of England's inflation target.

• The inflation outlook remains uncertain. Headline inflation has eased in recent months, but renewed volatility in energy markets has increased the risk that inflation proves more persistent than previously expected. The latest HM Treasury consensus forecast expects CPI inflation of 3.4% in Q4 2026 before moderating towards target during 2027, suggesting the Bank of England is likely to remain cautious when considering further interest rate reductions.

• The Bank of England has maintained Bank Rate at 3.75%, with future policy decisions expected to remain data dependent. While further rate cuts are still anticipated over the medium term, elevated government bond yields and ongoing geopolitical uncertainty are likely to keep financing conditions relatively restrictive compared with recent years. For commercial property, this reinforces the importance of pricing discipline and resilient income characteristics when assessing investment opportunities.

• Overall, the economic backdrop remains mixed. Occupational markets continue to demonstrate resilience, investment activity has stabilised, and pricing has become more transparent. However, heightened geopolitical uncertainty, elevated financing costs and cautious business sentiment are likely to continue tempering occupier and investor decision-making over the coming months.

Recent output trends and indicators

• GDP grew by 0.1% month on month in May, following a 0.1% fall in April. On a three-monthly basis, GDP grew by 0.7%, marking the sixth consecutive three-monthly growth. May’s growth, though, was driven only by a 0.3% rise in services output, supported by a strong scientific research and development sector. The services rise was offset by a 0.5% fall in production and a sharp 0.8% decline in construction output.

• The S&P Global UK manufacturing PMI moved to 52.5 in June, down from May’s four-year high of 53.9. There were rises in factory production as both domestic sales and some international exports increased, but new order inflows slowed. Employment rose for the third month in a row but only modestly as higher input costs slowed or halted headcount at many firms.

• The services PMI also declined in June, moving to 48.8 from May’s reading of 49.3. This is the second month in a row where the sector has contracted, with this being the steepest rate of decline in over three years. Total new work orders fell for the fourth month in a row while survey participants cited weakening demand, ‘lacklustre’ domestic economic data and rising inflation pressures linked to the Middle East conflict.

• Lastly, the UK construction PMI rose to 38.4 in June, an almost negligible rise from 38.2 in May. Despite the drop in energy prices on the month, the input price balance remained highly elevated, suggesting that price pressures remain very intense for the viability of projects. Disaggregated, the civil engineering balance fell at its fastest rate since 2020, with a reading of just 22.1 amid reports of delayed infrastructure projects. The housing activity index moved down to 35.9, and the commercial index rose to 41.5.

Labour market

• The UK unemployment rate remained unchanged at 4.9% in the three months to May, again defying consensus forecasts that it would rise to 5.0%. The number of unemployed people fell by 17,000. The employment rate increased to 75.1% as the total number of people employed rose by 148,000, marking the largest rise since July last year.

• The number of job vacancies decreased again in the latest quarter, falling by 7,000 to 712,000. On the month, however, vacancies were found to have increased by 2,000 between May and June. The vacancies-to-unemployment ratio has remained stable since last September. Early estimates for June’s payrolled employee data show the figure decreased by 4,000 on the month and 71,000 over the year.

• For the third month in a row, annual growth in average earnings held steady at 3.4% (excluding bonuses), in the latest data to May. Private sector pay rose by an average of 2.9% compared with 5.5% in the public sector.

Inflation

• Inflation fell to 2.6% in June, down from 2.8% over the previous two months and slowing more than consensus forecasts. This is now the lowest reading in 15 months as transport inflation slowed, with the largest downward pressure coming from motor fuels. Food inflation also fell to its lowest rate in nearly two years. Looking ahead, though, we expect some upward correction in inflation, as food prices and energy bill inflation will start to feed through.

• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 2.6% in the 12 months to June 2026, unchanged from the 12 months to May; the CPI goods annual rate slowed from 2.0% to 1.7%, while the CPI services annual rate eased from 3.7% to 3.6%.

Interest rates

• Bank Rate remained unchanged at 3.75% as the Bank of England’s Monetary Policy Committee voted 7-2 to maintain the rate. The next meeting of the MPC is scheduled for 30 July.

Retail occupier market

• The volume of retail sales rose by 1.0% in June, following a 1.2% increase in May, with sales volumes increasing by 0.6% over Q2 as a whole. Warmer weather and promotional activity supported demand for clothing, outdoor products and other non-food goods, while non-store retailers continued to benefit from strong online sales. Clothing retailers recorded their strongest monthly sales growth since September 2025, reflecting increased demand for seasonal merchandise.

• The UK GfK Consumer Confidence Index rose by six points to -17 in July, its largest monthly increase since November 2023. All five components of the survey improved, with the strongest gains recorded in expectations for the economy over the next 12 months and consumers' willingness to make major purchases. While confidence remains below its long-term average, the improvement suggests households have become more optimistic following easing inflation, lower borrowing costs and an improving economic outlook.

• The Q1 2026 RICS UK Commercial Property Survey reports a net balance of -19% for retail occupier demand, a modest improvement from -21% in Q4 2025, although sentiment remains subdued and retail continues to record the weakest 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 before remaining broadly stable during the first half of 2026, fluctuating between 1.7% and 2.0%. Annual rental value growth edged higher in Q2, reaching 2.0% in June 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, according to the MSCI Monthly Index. However, growth weakened sharply towards the end of the year, turning negative in December. Rental values remained under pressure during the first half of 2026, although the pace of decline eased in Q2, with annual rental value growth improving from -3.9% in April to -2.9% in June.

• Average rental value growth in the retail warehouse subsector was 3.0% in the 12 months to June 2026, up from a recent low of 0.6% per annum in June 2023. On a quarterly basis, growth stands at 0.7% (three months to June 2026), the annual equivalent of 2.8% (MSCI Monthly Index).

• The annual average rental growth rate for UK shopping centres turned positive at the start of the last year and has strengthened progressively, reaching 1.8% in June 2026. During the three months to May, rental growth was 0.4%, equivalent to an annualised rate of 1.7% (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 Q1 2026 RICS UK Commercial Property Survey reports office occupier demand remained slightly negative at -4%, broadly unchanged from -5% in Q4 2025. While sentiment remains subdued, office demand 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 2.9% in June 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 a peak of 8.4% in late 2025, before easing back to 5.2% in June 2026. By contrast, rental growth in the City of London remains materially weaker but has firmed to 3.6% per annum, indicating gradual improvement, according to the MSCI Monthly Index.

• The rest of the South East recorded marginally negative annual office rental value growth of -0.2% in June 2026, reflecting continued weakness across the market. In contrast, annual rental value growth across the wider UK regional office market strengthened to 4.7%, 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 months 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 Q1 2026 RICS UK Commercial Property Survey indicates that industrial occupier demand remained broadly flat at a net balance of -1%, marginally improving from -2% in Q4 2025. This suggests occupational demand has remained relatively resilient despite increasing 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 4.6% in June 2026, still above general inflation.

Transaction volumes

• A total of £10.7bn 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.£48.8bn, 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, marginally below the five-year average of 34%, 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 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 3.2% per annum in June 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 0.3% in June 2026.

• Looking at capital value performance over three months rather than 12 confirms a continued loss of momentum, with growth over the three months to June 2026 turning marginally negative at -0.2%. This marks a further weakening from the modest positive growth recorded earlier in the year and suggests annual capital value growth is likely to remain subdued in the near term.

• Capital growth performance varies considerably across the main commercial property sectors. Retail is outperforming the all-property average, with annual growth to June 2026 standing at 1.6%. Office capital values remain negative on an annual basis, at -3.0% over the 12 months to June 2026, although the pace of decline has moderated substantially and appears to be stabilising. Industrial capital growth sits between retail and offices at 1.3%.

• The all-property annual total return has remained firmly positive since early 2024 but has moderated more recently, easing to 5.9% in June 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 6.2%, while offices continue to underperform the all-property average, with annual total returns of 2.3%.

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.