Commercial property outlook: will the recovery across commercial real estate markets gain traction?

Following the release of the RICS Global Commercial Property Monitor, a recent webinar looked at the outlook for commercial property in 2025 across the UK, German, the Gulf and US markets.

Middle east commercial property markets at close to capacity

The commercial property market in UAE, Dubai and Saudi Arabia has experienced strong growth post-pandemic. Tenant demand from international and domestic occupiers has increased significantly, says Matthew Green, head of research – MENA at CBRE. Both major financial centres in the UAE, Abu Dhabi Global Market and Dubai International Financial Centre, are close to capacity, and this is also the case for quality office assets in Riyadh, Saudi Arabia.

In the Middle East, the strength of the residential market and its absorption of capital have led to an undersupply in commercial, retail and industrial and logistics assets, says Matthew. As a result, occupiers are increasingly opting to renovate existing accommodations rather than relocating, he adds.

Are US markets bottoming out?

In the US, the office market declined by 11% year-over-year at the end of 2024, however, for class A assets there is optimism that the market has bottomed out, says Cate Agnew FRICS, chief valuation officer – Real Estate at Natixis CIB Americas. Buyers are now starting to accept current market conditions rather than holding out for lower prices, she adds. A decline in construction output during 2022 to 2024 across the four major commercial real estate categories (office, retail, industrial and multifamily), has tightened supply and firmed up prices going into 2025 through lack of supply, she says. Cate also notes that there is a lack of correlation between interest rates and capitalisation rates for properties.

Rising confidence in property markets in the UK and Germany

Similarly, in Europe, interest rates are not as much of a focus for investors as one might expect as the market adjusts to above zero rates, says Helge Scheunemann, head of research Germany at JLL. Confidence in the property market is rising again, and there is significant investor liquidity awaiting the right opportunities, says Helge. Retail has made a strong comeback in Germany, including not only inner-city high-street properties, but also shopping centres, he says. Helge adds that industrial, logistics and residential are also doing well, but the problem is offices.

The UK is normally the fastest market to re-price and this cycle has been no different, explains Simon Durkin, global head of real estate research and analytics at BlackRock Equity Private Markets. Retail has proven relatively robust at a blended average level, while residential has performed strongly. While the office market is starting to stabilise, uncertainty remains due to changing work patterns since the COVID-19 pandemic, despite an increase in office attendance of late. While Simon agrees that real estate has reached the bottom of the cycle, he believes the strong bond and public markets are making real estate less attractive as an investment option but says nevertheless volumes are starting to increase.

The consensus from the discussion around the UK, European and US markets is that inflation is not a major concern for the real estate market currently and that geopolitical uncertainty, including tariffs, is viewed as the bigger risk.

The office market, and multi-use

Location plays a key role in the attraction of offices, and Simon cites the vibrant West End area of London as a major draw in encouraging people to return to the office. Helge also highlights the importance of high-quality office space, regardless of prime or B-tier locations. He notes that in Germany, investors are increasingly discovering B-tier premises and upgrading them, which is also supporting sustainability goals. Helge adds that Germany is seeing an increasing trend of renovating and refurbishing older buildings and towards multi-use.

The differential drivers of European and country-level performance are cities, says Simon. In future, the direction will be less about specific sectors and more about society's need for real estate. He believes this will lead us to towards thinking about mixed-use developments and how residential, for example, interacts with the workplace and with social infrastructure.

Simon believes that AI and its integration into the general workflow is the biggest potential disruptor to how buyers and businesses use office space. Greater efficiency through AI could impact office space requirements for staff and break the traditional link between business growth and increasing employee numbers, therefore, reducing the need for larger premises, he says.

In the US office market, financing is still available, but banks are focusing on lower-risk deals, typically single-asset loans to experienced borrowers, say Cate. The panellist also comments on the return of the Commercial Mortgage-Backed Securities market. Additionally, she notes the increase in financing for non-traditional assets, which are becoming more mainstream. In particular, she highlights asset classes in states that support affordable housing.

Sustainability in real estate

The business case for decarbonisation and environmental, social, and governance (ESG) remains strong regardless of the current political landscape, says Helge. However, the focus is shifting from ESG and sustainability towards value protection, creation and de-risking assets. Helge stresses that the key element is the need to address climate change, particularly in the property market, which, he says, is lagging behind other sectors.

Valuers have struggled with how to incorporate sustainability into their valuations, explains Cate. She suggests cost benefit analysis of energy savings could be the way forward. Simple actions such as swapping to energy efficient light bulbs or more complicated actions like changing out an HVAC system to increase energy efficiency benefits both landlords and tenants, she says.

In the UAE, sustainability and the growing number of building codes at the emirate level are driving the requirements and demand for green buildings, says Matthew. He believes that in the long term, this will likely lead to significant investment flows, as investors continue to seek out quality new assets.

The new administrations in the UK, US and elsewhere may impact on the degree to which monetary policy can loosen, while easing inflation may feed through into lower bond yields. In such an environment, how will the relative value of commercial property be affected?

And, amid such a mixed backdrop, will some areas that suffered in 2024 – such as parts of the retail sector – be able to recover in 2025? Our panel of experts examine the headwinds and tailwinds set to influence commercial property market conditions over the course of 2025.