Colliers Releases 2025 Commercial Property Predictions: Paradigm Shifts to Shape the Market

Posted by Colliers on 23rd December 2024 -

Colliers 2025 predictions report has been launched today and provides critical insights into paradigm shifts that are fundamentally reshaping investor and occupier perceptions of UK property.

The report identifies key trends in occupier demand, investment strategy, and the changing role of buildings in an increasingly hybrid world.
 
“A profound transformation of outlooks and expectations is already evident across UK commercial property markets,” said Dr Walter Boettcher Head of Research & Economics at Colliers. 
 
“While the ESG agenda and technology continue to drive change, we are also witnessing generationally driven perceptual shifts in consumption and work/life patterns. These are impacting all logistical, retail, leisure and workplace platforms. How businesses use space has shifted fundamentally. Investor’s mindsets are changing accordingly but the new period of tighter global finance is also changing approaches to achieving investment returns. This shift is reshaping not just individual sectors but the entire market landscape creating fresh opportunities for those ready and well-placed to adapt.”
 
Key Highlights:
• Economic Outlook:
The UK economy is set to stabilise in 2025, with interest rates expected to fall to 3.75% by the end of the year, supporting stronger transactional activity. Economic growth will primarily be driven by government consumption and investment, while household spending may remain constrained due to mortgage pressures and the ongoing cost-of-living challenges.
• Investment Trends – A Paradigm Shift in Approach:
Investment volumes are forecast to meet or exceed 2024 levels, potentially reaching between £45 billion and £50 billion. However, the approach to investing in commercial real estate is undergoing a profound shift. Investors are moving beyond traditional prime assets to focus on value-add opportunities, sustainability, and flexible space. As a result, UK commercial property returns are expected to reach double digits (11%) in 2025, supported by this changing mindset.
 
Sector Insights and Commentary:
 
National Capital Markets – Rethinking Risk and Reward
Investor sentiment is set to improve in 2025, with capital market activity forecast to strengthen in the second half as interest rates stabilise. Transaction volumes are expected to reach £45 billion to £50 billion, with investors focusing on value-add opportunities, ESG-compliant refurbishments, and higher-yielding assets. Yield compression is also forecast as gilt yields stabilise, supporting stronger returns.
 
“The days of relying solely on standing investments are over,” said John Knowles, Head of National Capital Markets at Colliers. “In 2025, the focus will be on uncovering value through refurbishment, sustainable upgrades, and alternative assets with strong income potential.”
 
Debt & Advisory – Easing Cost of Capital
The debt landscape is expected to improve in 2025 as the Bank of England continuing to reduce interest rates, possibly to somewhere around the low 400s by year-end. Refinancing demand is set to increase as borrowers seek to restructure debt in response to falling rates. However, lending will remain selective, with lenders prioritising prime assets and properties that are currently ESG-compliant or have a roadmap to achieving high sustainability targets.
 
“While we expect to see improved debt conditions, access will remain selective and the market polarised. Borrowers with high-quality assets, strong track records and clear sustainability credentials will have the advantage,” said Laurence Richardson, Director, Debt Advisory at Colliers.
 
Business Rates – Rising Costs for Retailers
Changes to business rates in the recent Budget will significantly impact larger properties with rateable values over £500,000. Retailers operating flagship stores and large high-street units are expected to face higher operating costs, adding further pressure on profitability. Calls for reform of the business rates system are expected to continue in 2025.

“The increase in the business rates multiplier will place significant cost pressures on retailers, especially those with larger, high-profile stores. Many retailers are now reassessing their store portfolios to balance operational costs with growth ambitions,” said John Webber, Head of Business Rates at Colliers.
 
Residential Resilience – Stability Amid Headwinds
Despite ongoing economic pressures, including sustained higher interest rates, the housing market has remained resilient, with house prices set to achieve 3% growth in 2024. Looking ahead to 2025, house prices are forecast to rise by 3% to 4%, supported by improving consumer confidence as households adjust to the reality of higher borrowing costs.

Private rents are expected to continue climbing, driven by limited stock and smaller landlords leaving the market due to regulatory changes, increased taxes, and tenant protection reforms. New housing starts are projected to rise as sales activity increases on new-build sites. However, planning system delays and remediation issues for affordable housing providers remain barriers to large-scale delivery and sector growth.
 
“The lynchpin for expanding the UK’s housing stock is to reform the planning system and reduce unnecessary delays and costs” said Andrew White, head of residential at Colliers.
 
Offices – The Rise of Flexibility and Sustainability:
A key shift in the office market is the growing demand for flexible leasing solutions and ESG-compliant spaces. Regional cities like Leeds are expected to see Grade A rents exceed £45 per sq ft, driven by the increased demand for high-quality, sustainable buildings. This shift reflects a broader change in how businesses approach office space – no longer simply seeking square footage but prioritising flexibility and sustainability.
 
“The integration of flexible leasing models and sustainability requirements will drive significant change in the office market, creating opportunities for innovative landlords and developers,” said Mike Hawkins, Head of National Offices at Colliers.
 
Industrial & Logistics – Adapting to New Demand Dynamics:
The industrial and logistics sector is seeing steady demand, with take-up of large units approaching pre-COVID averages. However, the paradigm shift is visible in the reduction of speculative development, shifting the focus to locations with high demand and limited supply. This is leading to a UK average rental growth of 3.5% to 5.5%. 
 
“As speculative development slows, the resilience of demand for prime locations will continue to support rental growth and attract investor interest,” said Len Rosso, Head of Industrial & Logistics at Colliers.
 
Retail – Resilience Amidst a Changing Landscape:
There is increasing competition for prime space in the retail sector in shopping centres, high streets and out-of-town locations with particular expansion in the realm of supermarkets. Despite challenges around rising costs, the limited availability of retail stock continues to push up prime rents, with the ongoing importance of physical retail shopping as a leisure experience reflected in footfall numbers.
 
“Retailers are competing for limited space, which is driving rental growth and underlining the continued value of bricks-and-mortar retail,” said David Fox, Head of Retail at Colliers.
 
Living (Residential and PBSA) – A Shift Towards Refurbishment and Growth:
Refurbishment of ageing student housing and Build-to-Rent properties is expected to surge, driven by the ongoing demand for high-quality rental accommodation in core cities. This shift reflects a new focus on retrofitting existing buildings to meet modern standards, rather than just new developments.
 
“The need for high-quality rental accommodation continues to grow, and refurbishment strategies will play a key role in meeting demand in 2025,” Lee Layton, Head of Living Capital Markets Research at Colliers.
 
Sustainability and ESG – A Non-Negotiable Priority:
Sustainability and ESG considerations are now at the forefront of all development and investment strategies. The shift towards net-zero carbon goals is accelerating, and by 2025, this will be a fundamental expectation rather than a consideration. This paradigm shift will drive both new developments and retrofits in the coming year.
 
“ESG is no longer just a priority – it is a necessity. Meeting net-zero goals will require collaboration and innovation across the property lifecycle,” said Matt Sal, Head of ESG at Colliers.
 
Hotels – Constrained Development, Rising Revenues:
The hotel sector is feeling the effects of the market’s paradigm shift, with limited development activity due to high costs and constrained debt availability. However, demand is growing, and operational revenues are expected to rise as supply remains static.
 
“While new supply is constrained, rising revenues will create opportunities for well-positioned hotel operators in the coming year,” said Marc Finney, Head of Hotels & Resort Consulting at Colliers.
 
Alternative Sectors – Shifting Focus to Long-Term Security:
Operational real estate, including healthcare and leisure, is experiencing a shift towards long-term investment, driven by the resilience and transparency these sectors offer. Rising operating costs are creating challenges, but these sectors remain attractive for those looking for stable returns.
 
“Alternative sectors offer long-term security, but addressing rising operating costs will be critical to unlocking value,” said James Shorthouse Head of Alternative Sectors at Colliers. 
 
Closing Summary:
“Colliers 2025 Predictions report highlights a year where resilience and innovation will define success in the UK commercial property market,” added Dr Walter Boettcher Head of Research & Economics at Colliers. “The challenges of recent years have laid the groundwork for a reimagined industry – one where creative investment strategies, bold occupier decisions, and the ability to adapt to evolving demands will set the pace. As we look ahead, collaboration across sectors will be essential to unlocking value and creating sustainable growth for the future.”