"One strategy we are seeing more often is a focus on mixed-use properties – for example, a commercial unit with residential apartments above it. This approach can allow investors to benefit from both the recovery of the commercial market and the resilience of the residential market, ensuring rental income from multiple streams"
- Paresh Raja - Market Financial Solutions
Five years ago, we were right in the midst of the Covid-19 pandemic, which shook the commercial real estate (CRE) market to its core. The accelerated shift towards remote and hybrid working, online shopping and at-home experiences has, even since the pandemic, placed significant pressure on commercial property values.
On top of that, the Bank of England’s rate hiking cycle, alongside sky-high inflation, placed a great deal of strain on businesses’ finances. Budgets were decimated, and many companies collapsed – the result was empty offices and CRE units without any tenants.
The results are plain enough to see still today: over the last three years, UK office values have fallen by 7%.
Green shoots of recovery
Building on a strong H1 2025, however, the commercial property landscape is starting to look much brighter now than it did at the start of the year.
For the most part, this will be down to the fact that the Bank of England has cut the base rate three times since February, leaving the base rate at its current level of 4%. In turn, this has allowed business confidence to rise, borrowing costs to fall, and the demand for office space – as well as other forms of commercial property, like warehouses – to stage something of a recovery.
For instance, a study from the CBRE indicated that there could be a 15% increase in investment in the CRE market across 2025 on the back of an improving macroeconomic climate. Meanwhile, the UK’s CRE sector has seen strong demand coming from overseas investors, particularly those based in the Middle East.
According to Knight Frank, for example, an investment boom means that £245 million has been invested into the UK CRE, up from £25 million in total volumes in 2024. That’s an increase of nearly 900%.
So, where is this investment going?
Investors are targeting logistics and prime properties
For one, the logistics subsector of UK CRE has remained incredibly resilient throughout the challenges of the last five years. The online shopping boom brought on by the pandemic has provided a ‘fertile ground for high-yield opportunities’, according to Spear’s.
What’s more, while office spaces are yet to return to the yields seen pre-pandemic, prime, well-located buildings remain low in supply and high in demand. With some of the world’s biggest companies requiring staff to be in the office a lot more regularly, another trend has emerged that sees companies seeking properties that offer top-class facilities and good transport links as a way of encouraging staff to come in.
As a result, well-finished and ideally placed office locations are providing investors with opportunities for higher rental returns, as well as shorter vacant periods.
London is leading CRE’s recovery
This is particularly true in London, where the return to the office has accelerated at a greater pace than the rest of the company.
In turn, this has pushed rental prices up significantly. In the City, for example, average rents reached a new record of £103.79 per square foot in Q2. Meanwhile, in the West End, average prime rent stood at £178.11 per square foot in the same period, which was up 44% on Q2 2024.
It means that Savills is forecasting 5.5% and 4.0% average rental prime growth for the City and the West End, respectively, across 2025.
Challenges remain for landlords
Despite these positive signs, the path to recovery is not without hurdles. The wider UK economy – as the headlines on any given week make clear – is struggling for growth. Meanwhile, the lending environment for commercial real estate remains complex, with many traditional lenders maintaining a cautious stance towards the sector.
What's more, regulatory pressures, stricter underwriting criteria, and the residual uncertainty over the future of office demand have all combined to make sourcing finance more difficult.
For CRE investors, this creates a particular challenge. On the one hand, demand is there to be capitalised on, with tenants willing to pay premiums for spaces that meet their needs. On the other hand, securing the capital needed to acquire, refinance, or refurbish such properties can still prove difficult.
As such, the onus has fallen on specialist lenders and brokers working with CRE clients to provide the support investors require. One strategy we are seeing more often is a focus on mixed-use properties – for example, a commercial unit with residential apartments above it. This approach can allow investors to benefit from both the recovery of the commercial market and the resilience of the residential market, ensuring rental income from multiple streams.
These transactions are often more complex, but they are also the types of deals that are sustaining momentum in the market. By working closely with brokers and moving quickly to get such deals over the line, specialist lenders can help investors seize opportunities and, ultimately, drive the commercial real estate sector’s continued resurgence.
