Commercial Property Trends: A Q1 2025 Market Overview

The first quarter of 2025 has shown early signs of recovery in the UK commercial property market. After a prolonged period of economic uncertainty and high interest rates, investor confidence appears to be gradually returning. Key sectors such as logistics, prime offices, and digital infrastructure are attracting renewed attention. This article explores how the market has performed so far this year, focusing on investment activity, sector-specific developments, and the broader economic conditions shaping current trends.

The Economy and Market Conditions

The broader economic environment remains a key factor shaping commercial property performance in early 2025. Following a stagnant end to 2024, UK GDP growth has remained subdued, reflecting ongoing pressures from global economic uncertainty and weak domestic productivity. While inflation has stabilised, geopolitical instability and market volatility continue to dampen risk appetite across many investment classes.

In response, the Bank of England maintained the base rate at 4.5% in March. Although this has helped contain inflation, elevated borrowing costs are still restricting the flow of debt into the property market. Developers and investors reliant on leverage remain particularly cautious.

That said, confidence appears to be slowly improving. Many in the industry now anticipate the possibility of rate reductions later in the year, depending on inflation data. This outlook has contributed to a sense that the market may have reached or is approaching the bottom of the current cycle.

Investment Activity and Capital Values

Investment levels have picked up noticeably over recent months, suggesting growing confidence in the commercial property market. In Q4 2024, UK commercial real estate investment reached £15.2 billion — the highest quarterly figure since mid-2022. This momentum has carried into 2025, with forecasts projecting total investment for the year could rise by around 5%, reaching approximately £53 billion.

Capital values (the estimated market value of property assets) are also expected to increase, with an average projected growth of 4.3% across all sectors. Retail warehouses are likely to lead this recovery, with a forecast capital value increase of 5.8% in 2025.

The most attractive opportunities are currently seen in income-generating, well-located assets, particularly those with strong sustainability credentials. Survey data from RICS shows that over half of property professionals believe the market has either ‘bottomed out’ or started to recover, reinforcing the sense that conditions are slowly improving.

Office Market Performance

The UK office market continues to be defined by a clear divide between high-quality, sustainable buildings and older, less efficient stock. Grade A space (typically modern offices with strong environmental performance) is in high demand, especially in Central London and the UK’s major regional cities. Limited new development has kept supply tight in these submarkets, which has supported above-average rental growth.

Occupiers are increasingly seeking space that reflects hybrid working models, placing greater value on flexibility, wellness features, and ESG credentials. This shift in priorities has led to rising vacancy rates in outdated buildings, many of which are now being refurbished or repositioned.

One significant trend in London has been the movement of large financial firms from Canary Wharf to the City, with institutions such as HSBC and Deutsche Bank opting to be closer to clients and key markets. Regional cities are also performing well, with office take-up in 2024 exceeding the five-year average, boosted by overseas investment.

Industrial and Logistics Sector

The industrial and logistics sector remains one of the strongest performers in the commercial property market. Demand continues to be driven by long-term trends such as the growth of e-commerce, the use of automation, and shifts in supply chain strategy. These factors have kept take-up steady in Q1 2025, with particular interest in last-mile logistics (distribution facilities close to population centres for quicker delivery) and distribution space near urban centres.

Investment in the sector rose by 20% year-on-year in 2024, and activity has remained healthy going into 2025. However, development is starting to slow, largely due to rising construction costs and planning delays. This could result in a tighter supply pipeline in the months ahead.

Sustainability is also playing a bigger role. With stricter energy efficiency standards expected by 2030, both investors and occupiers are prioritising assets that can meet future environmental requirements, making ESG-compliant warehouses increasingly attractive in this evolving market.

Retail Sector Overview

The retail sector is beginning to show signs of recovery, although performance varies across different types of retail property. Out-of-town retail parks and retail warehouses are currently leading the way, with investors attracted to their stable income and solid tenant demand. Capital values in this sub-sector are forecast to grow by 5.8% in 2025. This is the highest of any asset class.

Retail investment totalled £3.7 billion in Q4 2024, the strongest quarterly figure since 2022. Institutional investors accounted for over half of all retail transactions last year, indicating renewed interest.

However, some challenges still remain. Shop closures increased slightly in Q1 2025, partly due to business tax changes introduced in the Spring Budget. While prime retail locations are holding up, weaker high streets continue to struggle with vacancy and lower footfall.

Alternatives and Digital Infrastructure

Investor interest in alternative asset classes continues to grow, especially in sectors aligned with long-term technological and demographic trends. Data centres are leading this growth, driven by increasing demand for cloud storage, AI applications, and digital connectivity. There is a £1 billion data centre project in West London (a partnership between Segro and Pure Data Centres) which is among the largest of its kind in Europe and reflects the scale of demand in this space.

Other sectors gaining traction include life sciences property, build-to-rent housing, and purpose-built student accommodation. These assets are valued for their stable income potential, strong tenant demand, and resilience to short-term market volatility.

Conclusion

While economic conditions remain challenging, there are increasing signs that the commercial property market is stabilising Investors are beginning to re-engage, particularly in sectors with long-term stability such as logistics, prime office space, and digital infrastructure. The expectation of interest rate cuts later in the year could provide a further boost to market activity.

Looking ahead, the focus is likely to remain on high-quality, sustainable assets that offer long-term income security. Although caution persists, the data from Q1 suggests a shift towards selective growth and improving confidence. If current trends continue, 2025 could mark the beginning of a more consistent recovery across the UK commercial property sector.