The Key Trends Shaping Commercial Real Estate in 2025
Our research experts provide a high-level outlook for Commercial Real Estate markets in 2025.
4 minutes to read
2025 has begun in dramatic fashion, with a complex mix of economics, finance and geopolitics that threatens to obscure what will be a year of opportunity too. From the resilience of the UK market amidst global instability to the dynamic growth in the data centre sector driven by digital demands, here we delve into the various sectors and share expert analyses that shed light on the evolving real estate environment.
Global Markets
Victoria Ormond CFA, Partner, Head of Capital Markets Research
On a global scale, investment flows are showing modest increases in cross-border volumes with significant regional variations. The contrasting trends across continents, with declines in the Americas, surges in APAC, and increases in Europe, highlight the nuanced nature of global real estate investment in the current economic climate.
European Markets
Judith Fischer, Partner, European Research
The European market is influenced by ongoing political uncertainty, notably in Germany and France. Government bond yields have been rising across European countries, yet systemic stresses remain relatively low. The European Central Bank's monetary policy continues to adapt and potential further rate cuts depend on the path of inflation, economic growth as well as global policy developments. European CRE investment markets are showing signs of recovery, although this recovery is likely to be more gradual and uneven across different markets and sectors. Europe is expected to remain a top destination for global cross-border capital, supported by rising US outbound investments. Additionally, the widening Euribor swap rate differential to the UK and US is expected to attract further cross-border capital inflows.
UK Market
Nik Potter, Associate, Capital Markets Research
In the UK, the market remains a beacon of stability amid broader global uncertainties. The ongoing attractiveness of the UK to offshore capital, especially from US investors, underscores the market's resilience. The potential benefits from anticipated monetary policy easing, which could see about 100 basis points of interest rate cuts, are expected to alleviate household financial pressures and stimulate both the residential and commercial sectors.
Retail
Stephen Springham, Partner, Head of UK Markets Research
The retail sector has surprisingly emerged as the top performing commercial real estate asset class and is expected to continue this trend into 2025. Retail warehousing is driving much of this growth, with total returns in all retail forecast to rise to 8.9% this year. Despite operational cost pressures from increases in employer NI contributions and minimum wages, retail’s robust growth, including a return to rental growth across the board of sub-sectors, illustrates its resilience and potential for renewed strategic investment.
Industrial & Logistics
Claire Williams, Partner, Industrial & Logistics Research
Following two years of rising vacancy, rates will stabilise in 2025. However, the occupier market continues to face challenges, particularly around rising operating costs, higher labour costs (due to the rise in minimum wage and employer National Insurance contributions), and higher business rates. These cost pressures will amplify the benefits associated with locating in tax sites within Freeports or Investment Zones, and these locations could see increasing activity. Despite challenges in the occupier market, rental growth is set to continue, though the pace will continue to slow, which may have implications for investor preferences regarding rent review mechanisms.
London Office Market
Shabab Qadar, Partner & Chris Dunn, Associate, London Research
The London office market presents a study in contrasts, with a relatively robust leasing market set against a more cautious investment climate. The demand for high-quality, sustainable office spaces is driving a structural market shift, with prime rents in the City Core projected to grow by 5.4% over the next five years, and 4.5% prime rental growth is anticipated in the West End Core. This demand is, however, set against a backdrop of elevated availability, with an overall vacancy rate of 9.2% across London at the end of 2024. With that said, the supply of prime space in core submarkets remains incredibly restricted, which is providing upward support to prime rents. At the end of 2024, there was 2.4m sq ft under offer across London, signalling there is likely to be continued momentum in the leasing market in the short to medium term.
Data Centres
Darren Mansfield, Partner, UK Cities & Data Centre Research
The data centre sector is witnessing exponential growth, fuelled by sustained demand for cloud and, most recently, advances in artificial intelligence. Further significant investment by all market players, particularly hyperscalers, is anticipated, with Global data centre capacity expected to increase by 22% in 2025. This sector's growth underscores its crucial role in the global digital economy and presents substantial opportunities for investment in the associated real estate and infrastructure.