Commercial Market Outlook

Overview

• Global economic conditions are expected to remain subdued in the near term, with geopolitical tensions increasingly shaping the outlook. The IMF forecasts global GDP growth of around 3.1% in 2026 and 3.2% in 2027, remaining below longer-term averages, while advanced economies are expected to expand by approximately 1.7% in both years. The IMF has warned that the escalation of conflict involving Iran has increased downside risks through higher energy prices, renewed inflationary pressures and weaker business confidence. More broadly, heightened geopolitical uncertainty is expected to weigh on investment and consumer spending decisions, contributing to a more volatile macroeconomic environment. Against this backdrop, the IMF recently upgraded its forecast for UK GDP growth in 2026 to 1.0% from 0.8% previously, reflecting stronger-than-expected momentum at the start of the year.

• In the UK, recent GDP data point to a modest but improving growth backdrop. Output expanded by 0.6% in Q1 2026, supported by stronger activity in retail, services and construction. The economy, therefore, entered the latest geopolitical shock with greater momentum than previously anticipated. Nevertheless, rising energy prices and renewed uncertainty are expected to weigh on growth over the remainder of the year, particularly if elevated oil and gas prices persist.

• The medium-term outlook remains one of modest expansion but heightened uncertainty. The Office for Budget Responsibility (OBR) forecasts UK real GDP growth of around 1.1% in 2026, while the HM Treasury consensus remains weaker at around 0.7%. Although the IMF’s latest upgrade is more positive, forecasters generally expect growth to remain below long-term trend rates as higher financing costs, weaker business confidence and geopolitical risks continue to constrain activity.

• Labour market conditions continue to soften gradually. The unemployment rate rose to 5.0% in the three months to March, while vacancies have continued to trend lower and are now at their weakest level since 2021. Payrolled employee numbers have also declined for several consecutive months, indicating weaker hiring activity as businesses respond more cautiously to slowing demand and heightened uncertainty. Despite this, wage growth remains relatively elevated, particularly in the public sector, suggesting underlying labour market conditions are cooling only gradually. While the labour market has weakened compared with the tight conditions seen during 2022 and 2023, employment levels remain comparatively resilient by historical standards. However, rising business costs, geopolitical uncertainty and softer economic confidence are likely to limit hiring activity in the near term.

• The Bank of England’s Monetary Policy Committee voted to hold interest rates at 3.75% at its latest meeting, reflecting the increasingly uncertain inflation backdrop. Although inflation had been easing earlier in the year, renewed upward pressure on energy prices linked to the conflict involving Iran has complicated the outlook and increased the risk that inflation remains above target for longer. Financial markets had previously anticipated a gradual easing cycle during 2026. However, expectations for near-term rate cuts have moderated following the recent rise in oil prices and government bond yields. The IMF has nevertheless indicated that additional rate increases are unlikely to be required at this stage, suggesting that maintaining current policy settings should be sufficient to return inflation towards the Bank of England’s 2% target over the medium term.

• The economic backdrop, therefore, points to a period of modest growth with heightened uncertainty. While short-term indicators have improved, the outlook is increasingly shaped by external risks, particularly energy prices and geopolitical developments. As a result, the recovery is likely to be slower and more uneven than previously anticipated.

Recent output trends and indicators

• Monthly GDP grew by 0.3% in March, following growth of 0.4% in February (revised down from 0.5%). Services and construction grew by 0.3% and 1.5% respectively, while production declined by 0.2%. In the three months to March, GDP grew by 0.6%, the strongest rate since Q1 2025. However, the ONS has frequently reported strong growth in the first quarter of recent years. This trend, coupled with current drags on the economy, means we should be wary of reading too much into this robust Q1 figure.

• The UK Manufacturing PMI climbed to 53.7 in April, marking its highest level since May 2022 and up from 51 in March. This represents the sixth consecutive month of expansion for the sector, following a full year of contraction. While new orders grew at their fastest pace in four years, the sector remains constrained by persistent supply chain issues and a sharp spike in input prices. The ongoing conflict in the Middle East has also dampened business optimism, falling to its lowest point in a year.

• The Services PMI saw an unexpected boost in April, rising to 52.5 from 50.5 in March and exceeding market expectations. Firms attributed this growth in business activity to technology investments and new marketing initiatives. However, this expansion was tempered by a continued decline in employment and a sharp rise in inflationary pressures. Input cost inflation hit its highest level in the survey’s 30-year history, driven primarily by surging fuel prices linked to the Middle East conflict.

• The S&P Global UK Construction PMI fell sharply in April to 39.7 from 45.6 the previous month. This is well below market expectations and marks the 16th month of contraction for the sector. Respondents to the survey noted subdued demand amid geopolitical uncertainty, which is delaying clients from committing to projects. Employee jobs also fell on the month, while higher input prices were reported across the board, rising at their fastest rate since June 2022.

Labour market

• The UK unemployment rate rose to 5.0% in the three months to March, up from 4.9% in February. This is the first reading, which now includes the opening month of the US-Iran war, which added inflationary pressures on businesses. Despite the higher rate, though, the number of unemployed people actually fell by 77,000. The employment rate remained unchanged in the three months to March at 75.0%.

• The first estimate of payrolled employees data for April indicates a fall of 210,000 year on year and 100,000 over the month. This is the third month in a row of declines and follows March data, when payrolled employees declined by 28,000 on the month and 104,000 annually. April’s figure is the steepest decline since May 2020 as the war in the Middle East weighs on businesses' hiring activities.

• Job vacancies are now at their lowest level since April 2021 at just over 705,000. The estimated number of vacancies fell over the quarter, down by around 28,000 in the three months to April.

• Annual growth in employees’ average earnings was 3.4% (excluding bonuses) in the three months to March. Average regular earnings grew by 4.8% in the public sector and 3.0% for the private sector

Inflation

• The annual rate of inflation slowed to 2.8% in April, down from 3.3% in March and the lowest reading since March of last year. A sharp slowdown in housing and household services inflation led to the moderating rate, after the introduction of the latest energy price cap from 1st April. Transport costs also slowed, but even so, within that, motor fuel prices rose by 23%, the highest annual rate since September 2022.

• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 2.5% in the 12 months to April 2026, down from 3.1% in the 12 months to March; the CPI goods annual rate rose from 2.1% to 2.4%, while the CPI services annual rate fell from 4.5% to 3.2%.

Interest rates

• The Bank of England’s Monetary Policy Committee voted to hold interest rates at 3.75% in their April meeting. The Committee voted 8-1 in favour of holding rates, with one voting for a rise to 4%. The Governor stressed it is a difficult situation to predict, given the volatility of the war and its impact on energy prices.

Retail occupier market

• The volume of retail sales fell in April, down 1.3% over March. Fuel volumes fell in April, with some retailers saying that motorists were conserving motor fuel as prices rose after a spike in March, as motorists stocked up. When excluding fuel volumes fell by 0.4% on the month. Variable weather conditions during the month may have also contributed to the decline in clothing sales, which fell by 2.4%.

• The UK GfK Consumer Confidence Index rose two points to -23 in May, up from April’s lowest reading since October 2023. Of the five sub-measures, the Major Purchase Index fell two points to -20, its lowest in over a year. All other metrics rose over the month. The Savings Index (not included in the overall score) fell sharply by ten points, which suggests that consumers are having to use these funds to pay for daily expenses.

• 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 1.7% in April 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 April 2026, annual rental growth had turned negative at -3.9%.

• Average rental value growth in the retail warehouse subsector was 2.8% in the 12 months to April 2026, 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 2026), the annual equivalent of 2.4% (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 1.5% in April 2026. During the three months to April, rental growth was 0.9%, equivalent to an annualised rate of 3.8% (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 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 April 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 6.4% in April 2026. By contrast, rental growth in the City of London remains materially weaker but has firmed to 2.3% 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 April 2026, indicating continued weakness across the market. In contrast, growth across the regional markets strengthened to 4.7%, 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 April 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 rose sharply from near-zero levels during the pandemic and remained elevated through much of 2025, averaging around 4.6%. More recently, gilt yields have moved above 5% amid heightened geopolitical tensions following the escalation of conflict involving Iran, increasing concerns around inflation, energy prices and the outlook for interest rates. As a result, the spread between government bond yields and property yields has narrowed further, reducing the relative pricing advantage previously available to real estate investors.

• 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 April 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 0.7% in April 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 April 2026 turning marginally negative at -0.02%. 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 April 2026 standing at 2.1%. In contrast, office capital values are still falling on an annual basis, at -2.7% over the 12 months to April 2026, although performance is continuing to improve. Retail capital growth is currently between industrials and offices at 1.4%.

• The all-property annual total return has remained firmly positive since early 2024 but has moderated more recently, easing to 6.4% in April 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 7.1%, while offices continue to underperform the all-property average, with annual total returns of 2.6%.

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.