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 relatively resilient through the first half of the year, supported by services activity, while recent survey evidence points to improving conditions across parts of the economy. However, business confidence remains sensitive to geopolitical uncertainty, input costs and financing conditions, suggesting the outlook remains one of modest rather than rapid expansion.

• The medium-term growth outlook remains relatively restrained, although expectations have improved slightly. The latest HM Treasury consensus forecast now points to UK GDP growth of 1.1% in 2026, up from 1.0% in July, compared with the IMF forecast of 1.0% and the OBR's 1.1% projection. For 2027, the Treasury consensus has also edged higher to 1.1%. Growth is therefore expected to remain below longer-term trend rates, reflecting continued constraints from elevated financing costs, subdued productivity growth and wider global uncertainty.

• Labour market conditions continue to ease gradually. The unemployment rate remained at 4.9% in the three months to June, while vacancies continued to trend lower and payrolled employment weakened. Earnings growth remains relatively contained, despite some volatility in public sector pay. The latest HM Treasury consensus expects unemployment to reach 5.2% in Q4 2026, slightly below the 5.3% forecast in July, pointing to a continued gradual loosening in labour market conditions.

• The inflation outlook remains uncertain following the rise in headline CPI to 2.9% in July. While services inflation continued to ease and food price inflation moderated, higher household energy costs have placed renewed upward pressure on the headline rate. The latest HM Treasury consensus forecast expects CPI inflation of 3.3% in Q4 2026, slightly lower than the 3.4% expected in July, before moderating to 2.3% by Q4 2027. This suggests inflation is still expected to move gradually towards target, although the path is likely to remain uneven.

• 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 but has become marginally more supportive. Growth expectations have improved modestly, labour market pressures are easing and underlying inflation continues to moderate, although the recent rise in headline inflation highlights the potential for volatility. For commercial property, greater economic resilience and the prospect of further monetary easing should gradually support occupier and investor confidence, but elevated financing costs and geopolitical uncertainty are likely to continue tempering the pace of recovery.

Recent output trends and indicators

• GDP grew by 0.3% month on month in June, following no growth in May, which was revised down from the previously reported 0.1% increase. On a three-monthly basis, GDP grew by 0.4%, marking the seventh consecutive period of three-month-on-three-month growth, although the pace of expansion moderated from 0.6% in the three months to May. June’s growth was driven by a 0.4% rise in services output, with professional, scientific and technical activities making the largest positive contribution. This was partially offset by a 0.2% fall in production and a 0.1% decline in construction output.

• The S&P Global UK Manufacturing PMI eased to 51.9 in July, down from 52.5 in June, but remained above the neutral 50.0 mark for the ninth consecutive month. Despite the softer headline reading, manufacturing output grew at its fastest pace in almost two years, supported by stronger domestic and export orders. Employment increased for a fourth consecutive month, although growth slowed to near-stagnation amid continued uncertainty over the outlook. Input cost inflation also eased sharply, reaching a five-month low as supply chain pressures moderated.

• The S&P Global UK Services PMI rebounded to 52.1 in July, up from 48.8 in June and returning to expansion for the first time in three months. Business activity was supported by improved market conditions and a marginal rise in new orders, ending four consecutive months of decline. However, employment continued to fall amid limited pressure on capacity, while geopolitical uncertainty remained a headwind. Input cost inflation eased for a third consecutive month to its lowest level since February, contributing to an improvement in business confidence.

• Lastly, the S&P Global UK Construction PMI rose markedly to 44.7 in July, from 38.4 in June, signalling the slowest contraction in construction activity for four months. All three main sub-sectors remained below the 50.0 threshold, although rates of decline moderated compared with June. Commercial construction remained the most resilient, with the activity index rising to 46.8, supported by some signs of renewed tender opportunities. Housing activity increased to 41.8, marking its least pronounced contraction since October 2025. Civil engineering remained the weakest segment at 38.3 and continued to record the steepest decline in activity, despite the pace of contraction easing considerably from June. Across the sector, new orders fell at their slowest rate for ten months, while input cost inflation eased to a five-month low, providing tentative signs that conditions are beginning to stabilise.

Labour market

• The UK unemployment rate remained unchanged at 4.9% in the three months to June, although this represented a 0.1 percentage point decrease on the previous quarter. The employment rate also remained at 75.1%, increasing by 0.1 percentage points on the quarter, but standing 0.2 percentage points below its level a year earlier.

• The number of job vacancies decreased again in the latest quarter, falling by 6,000 to 707,000 in the three months to July. Vacancies were 19,000 lower than a year earlier, although estimates have remained broadly stable since the start of 2026. The vacancies-to-unemployment ratio also remained stable, with 2.5 unemployed people per vacancy, unchanged since the third quarter of 2025. Early estimates for July’s payrolled employee data show the figure decreased by 13,000 on the month and by 94,000 over the year, to 30.3 million.

• Annual growth in average earnings edged up to 3.5% (excluding bonuses) in the latest data to June, remaining relatively stable for the fourth consecutive three-month period. Private sector regular pay growth eased to 2.8%, compared with 6.1% in the public sector, although the latter continues to be affected by variations in the timing of pay awards.

Inflation

• Inflation rose to 2.9% in July, up from 2.6% in June and marking the first increase since March. The largest upward pressures came from housing and household services, particularly gas prices following the increase in the Ofgem energy price cap, and from furniture and household goods. These were partially offset by transport, where inflation slowed, with the largest downward contribution coming from motor fuels. Food inflation also continued to ease, falling to 1.3% from 1.7% in June.

• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 2.6% in the 12 months to July 2026, unchanged from June; the CPI goods annual rate increased from 1.7% to 2.2%, while the CPI services annual rate eased from 3.6% to 3.4%.

Interest rates

• Bank Rate remained unchanged at 3.75% as the Bank of England’s Monetary Policy Committee voted 6-3 to maintain the rate. The next meeting of the MPC is scheduled for 17 September.

Retail occupier market

• The volume of retail sales fell by 0.5% in July, following a revised 0.7% increase in June and 1.3% rise in May. Despite the monthly decline, sales volumes increased by 1.1% in the three months to July compared with the previous three months. Non-food stores and non-store retailers fell back in July, as earlier-than-usual promotional activity brought some demand forward into June, while hot weather also weighed on footfall. Clothing sales declined following strong growth in June, while food store sales increased, supported by the hot weather and the World Cup.

• 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 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 before remaining broadly stable during the first half of 2026, fluctuating between 1.7% and 2.0%. Annual rental value stood at 1.7% in July 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, momentum reversed sharply towards the end of the year, with rental values declining on an annual basis from December. Rental values remained under pressure through the first half of 2026, and despite a temporary easing in the pace of decline to -2.9% in June, annual rental value growth weakened again to -3.7% in July 2026.

• Average rental value growth in the retail warehouse subsector was 2.9% in the 12 months to July 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 July 2026), the annual equivalent of 1.8% (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 1.7% in July 2026. During the three months to July, 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 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 3% in July 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 5.3% in July 2026. By contrast, rental growth in the City of London remains materially weaker but has firmed to 3.8% 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 -0.3% in July 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 4.5% in July 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 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 July 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 0.1% in July 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 -0.3%. 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 July 2026 standing at 1.7%. Office capital values remain negative on an annual basis, at -3.2% over the 12 months to July 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 5.8% in July 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 5.9%, while offices continue to underperform the all-property average, with annual total returns of 2.1%.

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.