Commercial Market Outlook

Overview

• The global economy remains resilient despite the prolonged Middle East conflict and elevated energy prices. In its October World Economic Outlook, the IMF projected global GDP growth of 3.1% in 2026, up from 3.0% in July, and 3.4% in 2027. Investment in artificial intelligence and technology continues to support activity, but global inflation is forecast at 4.7% in 2026 before easing to 4.1% in 2027. Risks remain tilted to the downside, particularly for energy-importing economies.

• UK economic activity has remained relatively resilient, although growth continues to be modest and uneven. Recent GDP figures point to continued expansion, while business surveys suggest further growth in manufacturing and services. However, construction activity remains subdued, and higher energy and input costs continue to weigh on business confidence and investment decisions. Overall, the economy is showing resilience, but the conditions for a sustained acceleration in growth remain limited.

• Growth expectations have improved for 2026, but the outlook for 2027 remains subdued. HM Treasury's October consensus points to UK GDP growth of 1.3% in 2026, up from 1.2% in September, and 1.2% in 2027, unchanged. The IMF's October projections are also 1.3% and 1.2%, respectively. The OBR's October forecast is more cautious, at 1.2% in 2026 and 1.0% in 2027, with the latter downgraded by 0.5 percentage points since March as higher energy prices and interest rates weigh on activity.

• Labour market signals remain mixed. Unemployment fell to 4.7% in the three months to August from 4.9%, but job vacancies declined to 691,000 in July-September and payrolled employment remained below its level a year ago. Regular earnings growth increased to 3.7%, although private-sector pay grew by a more subdued 3.0%. HM Treasury's October consensus expects unemployment of 5.1% in Q4 2026 and 5.0% in Q4 2027, pointing to a continued drag on household spending.

• Inflation pressures have intensified. Annual CPI inflation rose to 3.5% in September from 3.1% in August, driven particularly by fuel costs, while core inflation reached 2.8% and services inflation 3.7%. HM Treasury's October consensus expects CPI inflation of 3.6% in Q4 2026, up from 3.4% in September's forecast, and 2.5% in Q4 2027, up from 2.3%. The OBR is more pessimistic for 2027, forecasting annual-average inflation of 3.4% and a return towards the 2% target in 2028.

• Bank Rate remained at 3.75% in October, with the next Bank of England policy decision scheduled for 5 November. Persistent inflation and elevated gilt yields limit the scope for near-term monetary easing. The OBR's October forecast is conditioned on market expectations of Bank Rate rising to just over 4.25% by mid-2027, rather than a sustained fall in borrowing costs. This outlook, alongside wider fiscal pressures, continues to weigh on commercial property financing and investor sentiment.

• Overall, the economic backdrop presents a mixed outlook for UK commercial property. Occupational markets continue to demonstrate resilience, with positive rental growth and sustained demand for high-quality space in supply-constrained locations. However, elevated financing costs, persistent inflationary pressures and geopolitical uncertainty continue to weigh on investor confidence and capital values. While investment activity is showing signs of stability, the recovery remains selective, with well-located assets offering secure income and sustainable rental growth best positioned to attract capital.

Recent output trends and indicators

• GDP grew by 0.1% in August month-on-month, following an unrevised increase of 0.4% in July. Growth was driven primarily by a 0.8% increase in production output, while services output was flat and construction output fell by 0.2%. Over the three months to August (compared with the three months to May), GDP grew by 0.7%, with services output rising by 0.9%, while production and construction output declined by 0.2% and 1.0%, respectively.

• The UK Manufacturing PMI (S&P Global) rose to 51.9 in September from 51.7 in August. This marks the 11th consecutive month of expansion in the sector, although the pace of growth has eased. Firms reported that new orders increased across both domestic and export markets, while business optimism remained strong. However, longer delivery times and rising input costs, driven by higher transport expenses, continue to place downward pressure on the sector.

• The S&P Global UK Services PMI stood at 52.1 in September, down slightly from 52.5 in August. New orders continued to increase but recorded their slowest rate of growth in three months, while employment levels continued to decline. Input cost inflation also accelerated to its fastest pace since June, driven by higher fuel prices and increased payroll costs.

• Lastly, the Construction PMI rose to 46.1 in September from 44.3 in August, reaching its highest level since January. Nevertheless, total new orders declined at the fastest pace since June amid subdued market conditions, as clients delayed decisions on major projects and input costs increased sharply. Employment continued to fall, while demand for construction products and materials also weakened

Labour market

• The UK unemployment rate made a surprise drop to 4.7% in the three months to August, down from 4.9% where it had stayed for four consecutive periods. This is the lowest reading since July 2025 as the number of unemployed people fell by 47,000 over the previous three-monthly period. The employment rate rose to 75.3%, up from 75.1% in the last quarter, with the number of employed people rising by 102,000 in the three months.

• The estimated number of job vacancies decreased by 21,000 this quarter (July-Sept) over the previous quarter to reach 691,000 vacancies. Vacancy estimates decreased in 14 of the 18 industry sectors, with the largest industry decline found in construction.

• First estimates for the number of payrolled employees in September show a fall of around 66,000 compared with the same month one year ago. On a monthly basis, payrolled employment shows a rise of 13,000. For August, the figure shows a rise of 1,000, well up from the decline of 26,000 that had been reported in the first estimate. Again, the September figures should be treated with caution as they are provisional and will likely be revised.

• Growth in wages (average regular earnings, excluding bonuses) rose to 3.7% in the June to August period, up from 3.6% in the previous three months. Annual average earnings rose by 6.3% for the public sector and 3.0% for the private sector.

Inflation

• Annual inflation rose to 3.5% in September, up from 3.1% in August and its highest rate since October last year. Transport made the largest contribution to the increase, with inflation rising to 6.6%, driven by higher motor fuel prices. Inflation also increased across housing and household services, communication, and recreation and culture. By contrast, inflation eased across restaurants and hotels, partially offsetting increases elsewhere.

• Core CPI (CPI excluding energy, food, alcohol, and tobacco) rose by 2.8% in the 12 months to September 2026, up from 2.6% in August; the CPI goods annual rate rose from 2.7% to 3.2%, while the CPI services annual rate rose from 3.4% to 3.7%.

Interest rates

• There is no Bank of England meeting of the Monetary Policy Committee in October. Therefore, the Bank Rate holds at 3.75% this month. The next meeting decision will be announced on 5 November.

Retail occupier market

• Retail sales volumes fell by an estimated 0.4% in September, after a rise of 0.7% in August (revised up from 0.5%). Online clothing retailers reported weaker sales, likely affected by the warmer weather during the month. Non-food store sales volumes fell 0.4% while supermarket sales were also down. Over the quarter, volumes were up 0.7% compared with Quarter 2, and 1.5% year on year.

• Consumer confidence fell sharply in October, dropping 11 points to -24, according to the latest GfK Consumer Confidence Index. Outside the COVID period, this was the largest monthly fall in more than a decade, since the Brexit vote in July 2016. All five sub-measures declined, with the largest falls in expectations for the general economic situation over the next 12 months, down to -36, and perceptions of the past 12 months, down to -48. The Major Purchase Index, which is not included in the overall measure, also fell sharply, dropping 14 points to -22.

• 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 1.5% in September, 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 2.8% in September.

• Average rental values in the retail warehouse subsector increased by 2.4% in the 12 months to September 2026. Growth has moderated from its recent of 3% in June 2026, with September recording the slowest annual increase since February 2025 (MSCI Monthly Index).

• Annual rental value growth for UK shopping centres has remained broadly stable in recent months, easing slightly to 1.4% in September 2026 from 1.6% in August. Over the three months to September, rental values increased by 0.5%, matching the rate recorded in the three months to August 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 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 of MEES regulations, with a minimum EPC rating of C currently expected to take effect from April 2028.

• 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 2.9% in September 2026, improving slightly from the 2.8% recorded in August, 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 5% in September 2026. Rental growth in the City of London also eased, falling to 2.9% 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 September 2026, reflecting continued weakness across the market. In contrast, annual rental value growth across the wider UK regional office market strengthened to 5.3%, 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 three-quarters of 2026 saw some significant lettings, including Bleckmann taking 761,000 sq ft in Lutterworth, and Halfords taking 775,000 sq ft in Baginton.

• 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 September 2026, still above general inflation.

Transaction volumes

• A total of £10.1bn was invested in UK commercial property in Q3 2026, down 5% on the previous quarter but 3% above the same period last year. While volumes eased slightly, quarterly investment remained above £10bn for a fourth consecutive quarter, pointing to some stability in capital deployment despite continued investor selectivity. The rolling annual investment total edged up to £49.0bn, from £48.8bn in Q2, and was 7% higher than a year earlier. This marked its highest level since Q1 2023. Although activity remains below the longer-term 10-year average, the latest figures suggest a gradual recovery in investment volumes, even as market liquidity remains uneven.

• Approximately 31% of Q3 investment was in London, below the five-year average, with overseas capital accounting for 75% of the total.

• Sector performance was mixed in Q3 2026. Industrial investment came closest to its five-year quarterly average, at just 6% below, while alternatives and retail were 18% and 19% below average, respectively. Offices recorded the largest shortfall, at 29%, although volumes were considerably higher than a year earlier. Alternatives nevertheless remained the most active sector by investment volume, reflecting sustained interest in resilient income streams and 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 was 3.1% in September 2026, in in with the August figures (MSCI Monthly Index).

• Annual all-property capital growth has continued to weaken from a peak of 2.7% in summer 2025. Capital values fell by 0.4% in the 12 months to September 2026, following declines of 0.1% in August and marking a further deterioration in annual performance (MSCI Monthly Index).

• Capital values declined by 0.3% over the three months to September 2026, compared with a 0.2% fall in August. The three-month growth rate has remained negative since May, fluctuating between -0.2% and -0.3%, indicating persistent but modest downward pressure on capital 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 September 2026 standing at 1.5%. Office capital values remain negative on an annual basis, at -3.2% over the 12 months to September 2026, although the pace of decline has moderated substantially and appears to be stabilising. Industrial capital growth sits between retail and offices at 0.1%.

• The all-property annual total return has remained firmly positive since early 2024 but has moderated more recently, easing to 5.2% in September 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 5.1%, while offices continue to underperform the all-property average, with annual total returns of 2.0%.

Investment outlook

• The UK investment market remains constrained rather than distressed. Elevated gilt yields and borrowing costs continue to weigh on investor sentiment, while fiscal uncertainty and geopolitical tensions are adding to caution. Transaction volumes remain subdued, with deals taking longer to complete and buyers adopting a more disciplined approach to pricing. Prime assets have generally proved more resilient, but secondary stock, particularly where significant capital expenditure or occupational risks are involved, requires a clearer risk premium to attract investment.

• Retail remains arguably the most settled of the main commercial sectors. Retail warehouses, supermarkets and stronger shopping centres continue to attract capital, supported by rebased rents, relatively low vacancy and dependable income streams. However, liquidity remains concentrated on assets with strong trading fundamentals, while weaker high streets and shopping centres requiring substantial capital expenditure face greater pricing pressure.

• Industrial occupational demand remains resilient, although investment pricing continues to be disciplined. Institutional investors and private equity firms remain active, particularly in logistics assets and multi-let estates offering opportunities for rental growth or value creation through proactive asset management. However, elevated financing costs are making tighter yields more difficult to justify, with buyers increasingly selective on location, asset quality, income security and asset management potential.

• The office market remains highly polarised, with occupational fundamentals generally stronger than investment activity. In Central London, demand for best-in-class space and constrained development supply continue to support prime rental growth, while capital values remained broadly flat in Q3. Regional offices face a more challenging investment environment, although prime assets in stronger cities continue to attract interest, particularly those offering secure income and strong sustainability credentials. Across both markets, secondary assets face greater scrutiny over refurbishment costs, letting risks and future liquidity, reinforcing the widening divide between prime and secondary stock.

• Looking ahead, elevated financing costs, geopolitical instability and uncertainty surrounding fiscal policy are likely to keep investment activity relatively subdued. Inflationary pressures, including those associated with higher energy and transport costs, could also limit the scope for further interest-rate reductions. Against this backdrop, debt-funded buyers remain sensitive to financing costs, while cash investors continue to benchmark property returns against comparatively attractive bond yields.

• Nevertheless, the foundations for a recovery remain in place. Capital is available and investors are willing to transact, but there is little urgency to deploy it at current pricing. Greater economic and fiscal clarity, easing geopolitical pressures and lower financing costs would help restore confidence and unlock activity. For now, the recovery looks delayed rather than derailed, with correctly priced, high-quality assets best positioned to attract capital.