Our latest briefing looks beyond the headlines to assess how macro volatility, political uncertainty and inflationary pressures are shaping UK commercial real estate pricing and investment sentiment.
ECONOMY
GDP Growth subdued
The UK economy entered 2026 with a strong base from the previous year. This performance continued in the first quarter of the year, where GDP grew by 0.6% (q/q) driven by a buoyant service sector. The challenge is to maintain this momentum in the face of several headwinds.
High energy prices, tighter financial conditions and persistent political uncertainty, with a new Prime Minister expected in the coming weeks, are likely to weigh on household finances and business investment decisions over the coming quarters.
Labour market still weak
The labour market remains weak, with a fall in the participation rate explaining the decrease in the unemployment rate. Additionally, the number of unfilled vacancies fell to a fresh five year low, all pointing to a labour market that continues to weaken.
Moreover, total wages in the economy grew by 4.4%, according to the latest report from the Office for National Statistics (ONS), driven by significant increases in bonuses and public sector wage growth.
Inflation remains steady
The latest data released on UK inflation showed that the headline rate remained stable at 2.8% in May, below market expectations of 3.0%. Although the services and energy components of inflation rose meaningfully, this was outweighed by a significant fall in food and core goods inflation. This suggests lack of pricing power for firms to pass on the increase in their energy costs to consumers in the context of the weak consumer demand outlined above.
Monetary policy: Hawkish bias receding
The Bank of England (BoE) will likely require more time over the coming months to decide its next move on policy rate. On the back of weakening labour market and economic activity, and limited inflation impulses, the market now sees one hike as more appropriate. With steady inflation, even with the risk of temporary increases, we see the BoE prioritising the weakening labour market and economic activity and holding rates steady for the rest of the year.
REAL ESTATE
More signs of energy crisis’ impact on capital values
Markets have gained some breathing space as energy prices have eased from recent highs, helped by tentative US-Iran progress, softer labour market data and a less urgent tone from the Bank of England.
For real estate, the relief is welcome but not yet decisive. Cost pressures, political uncertainty and elevated gilt yields are still weighing on valuations, with rental growth remaining the key offset in sectors where occupier demand is strongest.
Construction activity on the turn?
Income growth continues to be supported by a shortage of Grade A space, but there are early signs that development activity may be starting to recover. Commercial construction output has rebounded, while the pipeline of logistics and Central London office schemes due to complete in 2027 are above long-term annual averages.
Even so, new-build remains challenging. With construction costs rising, planning delays persistent, and financing conditions tight, refurbishment still offers a more practical route for many investors.
London likely to remain Europe’s most investable market
London’s office investment case remains underpinned by strong net absorption and a capital market depth that few European markets can match.
Demand for Grade A space continues to be supported by resilient office-based employment, an outperforming tech sector, and occupiers focused on quality and location. With macro uncertainty remaining high, these structural advantages should keep London firmly on the radar for global capital.
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