The outlook for commercial property in 2025

The Savills Blog

The outlook for commercial property in 2025

As we kick off 2025, we’re anticipating less uncertainty in the UK commercial property markets than in 2024, notwithstanding the fact that the US Presidential Inauguration on the 21 January is likely to herald some more ‘known unknowns’ in terms of geopolitics. 

As I wrote this time last year, however,  previously we’ve been able to track little evidence that a change in President has ever materially affected US real estate investors’ behaviour when it comes to cross-border activity. So, with our own General Election done and dusted with a clear outcome, we are fairly comfortable forecasting greater investor confidence and a recovery in capital value growth in many UK commercial sectors, while still keeping half an eye on macro-economic events.

Pricing in both the office and industrial sectors turned in 2024, and investment volumes rose 20% on 2023, although remained below the 10-year average muted by limited access to finance in the first half of 2024, caution among some buyers, and few vendors wishing to sell into a sluggish market. But going into 2025 things are looking different: we’ve now had two base rate reductions, and, although we shouldn’t count additional cuts before they’re hatched, a further 100 basis points of cuts or thereabouts is widely anticipated over 2025 and 2026, which will continue to reduce the cost of borrowing and, in most markets and sectors, make debt accretive.

Wider economic prospects

We predict that 2025 will see accelerating GDP and business growth (although we have revised our optimism and take-up forecasts down a notch in light of some of the policies announced in the Budget), which should benefit commercial real estate and drive the occupational markets. These have proved more resilient than anticipated over the last five years, with many geographies and sectors reporting low vacancy rates and above-average prime rental growth in the face of an undersupply of new space and sluggish development activity over the past decade.

Old sectors reappear on shopping lists

So, with occupational activity remaining robust and investors being more able and willing to deploy, where will the money be going? It’s almost a cliché these days to say that ‘beds, meds and sheds’ will remain popular, given their growth continues to be driven by long-term demographic, social and structural trends. What’s not a cliché, however, is the story around retail. Having seen rents move upwards across 2025 and investor demand grow, we’re predicting that 2025 will see more institutional interest in UK retail than in the previous decade. Prime shopping centres, retail warehouse parks, and substantial high street parades should all be buys in 2025, with investors motivated both by where we are in the cycle in terms of receiving both real income and capital value growth, and more confidence in the sector as a whole as increased consumer confidence feeds through to retail spend.

But offices are my big call: with yields not hardening in 2024, 2025 is likely to be their year, and, unlike previously, the positive story won’t just be limited to super prime spaces. Most major UK office markets have no new buildings coming on stream in the next three years, so if business demand continues on its path and the economy improves, office rental growth will be strong across almost the whole quality spectrum, so long as the location is good. Some investors will be hesitant to dip their toes back in, but the returns will be compelling enough to convince others.

Overall, therefore, I’m greeting 2025 with cautious optimism: the foundations of the commercial real estate recovery are in place; we will hopefully see them built upon very shortly.

 

Further information

Contact Mat Oakley

UK Cross Sector Outlook 2025

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