Commercial Market Outlook

Overview

• Global economic conditions are expected to remain subdued in the near term, with geopolitical developments continuing to shape the outlook. The IMF forecasts global GDP growth of 3.1% in 2026 and 3.2% in 2027, below pre-pandemic averages, with downside risks still linked to energy prices, trade disruption and weaker confidence. However, the recent US-Iran agreement and the subsequent fall in oil prices have reduced some of the immediate inflationary pressure, although the full impact may take time to feed through to official inflation data.

• In the UK, recent data point to a modest but uneven growth backdrop. GDP expanded by 0.6% in Q1 2026, but monthly output contracted by 0.1% in April, highlighting the fragility of the recovery. Services activity weakened in April, while construction recorded only marginal growth and production was flat. Overall, the economy entered Q2 with more momentum than previously expected, but short-term indicators remain mixed.

• The medium-term outlook remains one of modest expansion. The OBR’s March forecast remains unchanged, with UK real GDP growth projected at 1.1% in 2026, while the June HM Treasury consensus forecast points to slightly weaker growth of 0.9% in 2026 and 1.0% in 2027. This suggests that while recession risks have eased, growth is still expected to remain below long-term trend rates.

• Labour market conditions continue to soften gradually. The unemployment rate fell slightly to 4.9% in the three months to April, but vacancies continued to decline and remain at their lowest level since 2021. Payrolled employee numbers rose marginally in May, following declines in March and April, suggesting that hiring conditions remain subdued. Wage growth has eased but remains stronger in the public sector than the private sector, indicating that labour cost pressures have not fully dissipated.

• The inflation outlook remains cautious. CPI inflation held at 2.8% in May, below market expectations, although transport costs increased due to higher motor fuel prices and air fares. The OBR expects CPI inflation to fall to 2.3% in 2026 and return to 2.0% from 2027 onwards, while the June HM Treasury consensus forecast is higher, at 3.7% for Q4 2026. The recent fall in oil prices is positive, but there remains a risk of short-term volatility given lags in official data and the potential for renewed energy price disruption

• The Bank of England held Bank Rate at 3.75% at its latest meeting. While further rate cuts may still be possible if inflation continues to moderate, the near-term path is likely to remain data dependent. For commercial property, the key issue remains the extent to which lower inflation and more stable bond yields translate into improved debt costs, pricing confidence and investor activity.

• The economic backdrop, therefore, points to a slow and uneven recovery. Growth is positive but modest, inflation risks have eased but not disappeared, and labour market conditions are gradually loosening. For commercial property, this should support a gradual improvement in sentiment, although occupier and investor decision-making is likely to remain cautious until there is greater confidence around rates, inflation and global stability.

Recent output trends and indicators

• GDP contracted by 0.1% month-on-month in April, following growth of 0.3% in March. This marks the first contraction in eight months and was primarily driven by a 0.2% decline in services. The largest downward contribution came from a 2.2% fall in administration and support services, while arts, entertainment and recreation also declined by 4.3%. Construction rose slightly by 0.1% over the month, while production output remained unchanged.

• The S&P Global UK Manufacturing PMI moved slightly upwards to 53.9 in May, from 53.7 the month before. This marks the strongest expansion for the sector in four years as output grew to a three-month high and new orders rose for the sixth month in a row. Geopolitical tensions, shipping disruptions and supply chain issues continue to place downward pressure on growth. Again, input cost inflation rose to a nearly four-year high from rising materials, taxes and labour costs.

• For the first time in over a year, the UK Services PMI moved into contraction with a reading of 49.3 in May, down from 52.7 last month. New orders fell for the third consecutive month as both domestic and overseas demand remained subdued. Service providers cut employee numbers sharply while hospitality and transport noted high input costs, although input cost inflation eased slightly from April’s over three-year high. Concerns over price pressures weighed on business expectations for the year ahead, which are now at their weakest in over a year.

• Finally, the UK Construction PMI fell to 38.2 in May, down from 39.7 the previous month and the sharpest contraction since May 2020. Once again, housing is the lowest performing sector, but commercial and civil works also declined. New orders fell at the fastest pace in over six years amid client caution, rising inflation and global geopolitical issues. Employment also declined and input cost inflation again accelerated to its highest rate since June 2022.

Labour market

• The unemployment rate fell to 4.9% in the three months to April, below market expectations that it would hold at 5.0%. The total number of unemployed people declined by 105,000, largely driven by a fall in those unemployed by up to six months. The total employment increased by 100,000 but the rate remained unchanged at 75.0%.

• The number of pay-rolled employees in the UK rose by 2,000 in May, following declines of 53,000 in April (upwardly revised from initial estimates) and 28,000 in March. The war in Iran and the resulting inflationary pressures on businesses clearly weighed on hiring activity, making this month's rise welcome, though it will likely be revised in the coming months.

• Job vacancies continued to decline over the latest three months with the first estimate showing a fall of 19,000 to 707,000. This is again the lowest level of vacancies since April 2021.

• Annual growth in average earnings remained at 3.4% (excluding bonuses), in the three months to April. Earnings growth was 5.1% for the public sector and 2.9% for the private sector.

Inflation

• CPI inflation remained unchanged at 2.8% in May, below market expectations of 3.0%, and at its lowest level since March 2025. Inflation slowed for food and alcoholic beverages to 2.2%, the lowest rate since December 2024. The largest upward contribution came from transport, with inflation rising to 6.8% from 4.5% in April, driven mainly by higher motor fuel prices and increased air fares.

• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 2.6% in the 12 months to May 2026, up from 2.5% in the 12 months to April; the CPI goods annual rate slowed from 2.4% to 2.0%, while the CPI services annual rate rose from 3.2% to 3.7%.

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 1.2% in May, recovering from the decline recorded in April. Warmer weather boosted demand for seasonal goods, including outdoor furniture and household items, while online sales also increased strongly. When excluding fuel, sales volumes also rose by 1.2% on the month. Clothing retailers reported stronger trading conditions as favourable weather encouraged spending, contributing to a broader recovery across non-food categories.

• The UK GfK Consumer Confidence Index remained unchanged at -23 in June. Of the five sub-measures, one improved, two deteriorated and two were unchanged over the month. Expectations for the general economic situation over the next 12 months improved, while views on both personal finances and the economy over the past year weakened. The Savings Index (not included in the overall score) fell by two points, suggesting households remain cautious despite a modest improvement in economic expectations.

• 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 continued to strengthen through most of 2024 and 2025, rising from 0.5% in January 2024 to a peak of 2.6% in both September and November 2025. However, momentum eased at the end of the year, with annual growth moderating to 1.8% in May 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 2025, according to the MSCI Monthly Index. However, momentum weakened markedly towards the end of the year, and by May 2026, annual rental growth had turned negative at -3.8%.

• Average rental value growth in the retail warehouse subsector was 2.9% in the 12 months to May 2026, up from a recent low of 0.6% per annum in June 2023. On a quarterly basis, growth stands at 0.5% (three months to May 2026), the annual equivalent of 1.9% (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 1.7% in May 2026. During the three months to May, rental growth was 0.5%, 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 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 3% in May 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 5.5% in May 2026. By contrast, rental growth in the City of London remains materially weaker but has firmed to 3.2% per annum, indicating gradual improvement, according to the MSCI Monthly Index.

• The rest of the South East recorded average annual office rental growth of 0.1% in May 2026, indicating continued weakness across the market. In contrast, growth across the regional markets strengthened to 4.6%, highlighting the ongoing divergence between London-adjacent markets and the wider UK regional office sector (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 4.4% in May 2026, still above general inflation.

Transaction volumes

• A total of £10.7bn was traded in Q1 2026, representing a decline from the elevated levels seen in Q4 2025 but broadly in line with recent quarterly norms. Volumes were modestly above Q1 2025, indicating a gradual improvement in activity despite ongoing macro uncertainty. The rolling annual total increased to c.£48.2bn, continuing its recent upward trend but remaining below the five-year average, highlighting that while momentum is improving, the recovery in investment volumes remains uneven.

• Approximately 34% of Q1 investment was in London, marginally below the five-year average of 35%, with overseas capital accounting for 42% of the total.

• In Q1 2026, alternative assets accounted for the largest share of UK investment activity at 38%. Offices followed at 28%, with industrial at 23% and retail assets at 11%. When compared with their respective five-year quarterly averages, all sectors saw activity fall below trend. Retail recorded the most pronounced underperformance, followed by industrial and offices, while alternatives were broadly in line with their longer-term average, highlighting continued resilience in structurally supported sectors despite more subdued market conditions overall.

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 remained elevated through much of 2025 and recently moved above 5% amid heightened geopolitical tensions in the Middle East and concerns over inflation and interest rates. However, bond markets have since stabilised following signs of de-escalation in the conflict, leading to some easing in yields. While uncertainty remains, a sustained moderation in government bond yields would improve the relative attractiveness of real estate, helping to support investor sentiment and market liquidity.

• 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 3.1% per annum in May 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 0.5% in May 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 May 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. Industrial is outperforming the all-property average, with annual growth to May 2026 standing at 1.7%. Office capital values remain negative on an annual basis, at -2.8% over the 12 months to May 2026, although the pace of decline has moderated substantially and appears to be stabilising. Retail capital growth sits between industrials and offices at 1.5%.

• The all-property annual total return has remained firmly positive since early 2024 but has moderated more recently, easing to 6.1% in May 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 6.7%, while offices continue to underperform the all-property average, with annual total returns of 2.5%.

Investment outlook

• Markets have slowed but not stalled. Capital remains active, albeit more selective, with decision-making timelines extending rather than transactions being abandoned. Pricing has held broadly steady across most sectors, with the adjustment felt more through thinner liquidity and slower execution than outright repricing. Recent geopolitical tensions have unsettled sentiment and lifted energy prices, feeding into inflation expectations, but real estate has so far absorbed this without too much disruption.

• Transaction activity has become increasingly deal-specific. Strong income with genuinely robust covenant strength at realistic pricing levels continues to transact, while secondary stock remains challenged by wide bid-ask spreads. Offices and retail have proven more resilient than expected, particularly where income characteristics are defensive, while industrial has seen a softer quarter. In the UK office market, London activity picked up in March, reflecting constrained supply in core sub-markets and sustained occupier demand for high-quality space.

• Debt is available but cautious, with lenders focused on asset quality, sponsor/covenant strength and conservative leverage in a more uncertain inflation and rates environment. Overall, activity appears further delayed rather than lost. With capital still present and fundamentals intact in stronger segments, there remains a clear route to improved volumes into H2 2026 if macro conditions stabilise.