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As 2026 begins, uncertainty lingers and investor strategies evolve. Will supply constraints sustain rental growth, and which sectors could surprise on pricing? Mat Oakley explains what is set to shape commercial property’s next chapter.
The foundations of the commercial real estate recovery are solid, but construction is slow
This time last year, we were looking ahead to a new US presidency and suggesting that the first Budget of the new Labour government in the UK had provided some clarity on the outlook. Somewhat more perceptively, we commented that base rate cuts might not feed into a recovery in property yields given the high level of uncertainty surrounding the domestic and global outlooks. Twelve months later, and much the same situation prevails, with the latest UK Budget reducing some short-term uncertainty but raising it for the medium term, and US-driven market uncertainty becoming the norm.
In the UK commercial property market, the occupational story remains robust, based around low levels of development activity and normal levels of tenant demand. This has continued to deliver higher-than-normal prime rental growth across all sectors. However, the last year has shown us how selective tenants are on location, with prime buildings in secondary spots proving much harder to let than would be normal in this phase of the property cycle.
The occupational story remains robust, based around low levels of development activity and normal levels of tenant demand
Mat Oakley, Director, Commercial Research
Another area where the cycle is clearly different from that of any of the recoveries in the last thirty years is the lack of distress in the investment market. For policymakers, this is a good thing, and much of this stability can be attributed to the changes that were put in place to lending practices after the global financial crisis (GFC). However, for the investment market, the lack of distressed sales has created a target-poor environment for the opportunistic buyers who typically kick off any recovery phase of the cycle. This, combined with the less-than-attractive spread between some property yields and the all-in cost of debt, goes a long way to explaining why the recovery in investment volumes and prices has been more muted than normal.
Has the government created an environment for growth?
The last six months has seen a high degree of scepticism in some quarters about whether the UK is a growth-friendly environment. This speculation is one of the reasons why the risk-free rate in the UK has gone in the opposite direction to the policy rate, in turn limiting the potential for a recovery in commercial property yields. This speculation rose to fever pitch before the November Budget. But we believe that there are strong reasons why it should subside in 2026, and why some of the barbs aimed at the UK are less than fair.
One of the less exciting, but in our view most important, changes in the latest Budget was the commitment to having only one fiscal event per year rather than two. This puts the UK in line with its peers and removes one of the short-term reasons to delay decision-making on transactions.
There is no doubt that our economy has its challenges, and we expect that economic growth will be weaker in 2026 than 2025, but this is not unique to the UK. Our peers across Europe and Asia are equally challenged by demographic change and weak productivity growth. Even when we turn to things that the Chancellor can affect, the story isn’t particularly negative, with the UK having the second lowest debt-to-GDP ratio in the G7.
2026 should see a rising recognition that the UK is in a comparatively good place, and the immediate reaction of the bond markets to the latest Budget suggests that they are happy that it was fiscally responsible. However, it is not all rosy in the garden, and the back-ending of many of the tax rises and the harshest of the spending control suggests that the Chancellor is hoping for more economic growth than the OBR is predicting.
Our view is that the government can only create an environment for growth, rather than deliver the growth itself, and that the less uncertainty there is around future government policy, the better it is for tenants and investors. While the May local elections will undoubtedly lead to feverish speculation around the incumbent government’s future, we believe that the outlook is more stable than it was a year ago and that businesses and investors should be more capable of making balanced decisions than they were six or twelve months ago.
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Will weaker economic growth in 2026 feed through into a weaker occupational story?
Logically, the answer to this question should be ‘yes’, and it’s hard to argue that the fiscally-induced slowdown in the UK will not lead through to weaker occupational demand across all the key commercial property sectors. However, the higher-than-normal prime rental growth that we have seen over the last five years has not been about a boom in tenant demand but the lack of supply. So, unless we see a surge in development completions in 2026 (or a rise in tenant exits), the undersupply and rental growth will be sustained.
The supply story is becoming increasingly nuanced, and investors would do well to dig into micro-market supply trends before committing. For example, in the central London office market, the level of development and refurbishment starts in 2025 was almost exactly in line with the average, while in the key regional city office markets, there were almost no development starts. However, while the London pipeline seems full, the bulk of the completions are outside the Core, and the bulk of tenant demand is in the Core. Similarly, in both the retail and logistics sectors, a high headline vacancy rate can often hide substantially lower availability in the prime or dominant schemes and pitches.
One of the joys of real estate is that there is always a hot new macro trend that feeds through into a real estate need, and 2025’s star was undoubtedly the AI and cloud-driven boom in demand for data centre space. Like so many of the rising stars of recent years, this is a sector that requires a high degree of investor expertise to assess, and we believe that the biggest impacts of the data centre boom in the UK in 2026 will be in terms of land deals and competition for land. Logistics developers, in particular, are already being outbid for key data and power-enabled sites, and we expect this trend to continue for the foreseeable future.
The office market remains our most favoured pick for investors in 2026, with steady (but highly location-focussed) tenant demand, a lack of new supply, and better-than-normal rental growth. The definition of prime has changed and is more location-specific than ever. Indeed, in some cases, we believe that a perfect location can compensate for a less-than-five-star building, something that should enable developers to value-engineer plans to a better return.
Retail property remains in the growth phase of a traditional cycle, with vacancy rates in dominant locations down to cyclical lows. This is delivering demonstrable rental growth, though we do expect that to soften in 2026 as retailers must adapt to higher operating costs. Medium-term, we remain optimistic about retail now that omnichannel is omnipresent and shopping centres are looking increasingly defensive against some wider structural changes, such as climate events and security.
A gentle slope upwards in prices and volumes in 2026, rather than a typical V-shaped bounce
The most interesting thing about the commercial property market at the start of 2026 is the lack of recovery in pricing that we saw in 2024 and 2025. Yields, even on prime, remain high, and in some cases spreads between locations are throwing up some interesting questions about where mispricing could lead to inward yield shift.
In the retail and office markets, yields are in line with their GFC peaks, and in the office market, the spread between the London City and West End, and then between central London and the regions, is wider than it has ever been.
However, the factors that held back a V-shaped recovery in 2025 are still mostly present in 2026. We do expect several more cuts in the base rate, but are less confident that these falls will feed through into the gilts market and hence borrowing costs. Competition amongst lenders for the best opportunities will lead to slightly more attractive LTVs and margins this year, but not enough to stimulate a surge in investment activity.
Another thing that has stimulated a recovery in the past is a rise in distressed sales, and we do expect to see a gentle trickle of motivated sales this year, but not a flood. Values will continue to slide on secondary and tertiary assets, but the yields on offer in such segments are already very attractive and have not stimulated a surge in investor interest.
As our cross-sector returns forecast shows, we expect that income will remain the most important component of total returns over the next five years, and this will mean that careful stock selection will be more important than ever in terms of capturing the best of the recovery phase of this cycle. Investment volumes will be up around 10% again this year, and this will bring the UK to around £55 billion of turnover in 2026. We do expect to see some prime yield hardening across most sectors, though this is more likely to be in the 25–50 bps range in 2026 than the more typical 100+ bps that we have seen in previous cycles. While this all might seem rather dull, the returns on offer from commercial real estate over the next five years will all be in the 8–10% range, which is exactly in line with the long-run average, and sits property where it should be between equities and gilts.