Commercial Market Broken as Budget Jitters Stall Activity

Summary: Investor and occupier confidence in the UK commercial property market has sharply declined in the third quarter of 2025, largely due to uncertainty surrounding the upcoming Autumn Budget and rising debt costs. This has resulted in fewer deals, tighter lending criteria, and a two-tier market that favours prime, sustainable assets over secondary stock.

Confidence Drops Amid Budget Uncertainty

The latest RICS UK Commercial Property Monitor reveals a significant fall in both investor and occupier sentiment during Q3 2025. The Occupier Sentiment Index dropped to –12, while the Investment Sentiment Index fell to –10, both entering negative territory. This decline reflects the ongoing strain from rising borrowing costs and the looming uncertainty of the November Budget.

Economist John Maynard Keynes coined the term “animal spirits” to describe the confidence and emotions that drive economic decisions. Currently, this vital spark is missing from the commercial property sector, dampening activity as investors and occupiers hesitate amid policy ambiguity.

Market Challenges and Sectoral Impact

The commercial property market has been absorbing the effects of higher interest rates, slower economic growth, and changing work patterns for over two years. The partial return to office working has been slow and uneven, while online shopping continues to reduce demand for retail space.

Retail has been particularly affected, with tenant demand falling by 21%, the steepest decline among commercial sectors. Overall tenant demand across all sectors declined by 10%, and 12% of respondents reported worsening credit conditions. Landlords are increasingly offering leasing incentives, especially in retail and secondary office markets, to attract tenants.

Government Policy Uncertainty Weighs on Transactions

The RICS report highlights government policy uncertainty as the primary reason for stalled transactions. Anticipation of tax rises, changes to business rates, and further fiscal tightening have made investors cautious. The possibility of reforms to Stamp Duty Land Tax (SDLT), capital gains tax (CGT), and transaction structures is causing many to delay investment decisions.

Smaller and medium-sized landlords are particularly vulnerable, lacking the financial buffers and diversified portfolios of larger institutional investors. As policy risks increase, these landlords tend to reduce activity first, further slowing the market.

Two-Speed Market: Winners and Losers

The commercial property market is increasingly divided. Prime assets such as well-located, energy-efficient offices, logistics facilities, data centres, and life-science campuses remain in demand and attract financing. Conversely, secondary and tertiary properties, including older offices and less desirable retail units, are becoming “value traps” with declining capital values and rising vacancies.

Compliance with environmental, social, and governance (ESG) standards and energy performance certificates (EPCs) has become essential. Buildings failing to meet these expectations are losing appeal rapidly, contributing to the widening gap between prime and secondary assets.

Implications for Landlords and Investors

Landlords who adapt by upgrading properties, improving energy efficiency, and offering tailored leasing incentives are more likely to maintain rental income and attract tenants. Those with refinancing deadlines in 2025–26 should prepare by updating valuations, stress-testing cash flows, and engaging with lenders early to address creditworthiness and compliance requirements.

While borrowing costs have eased slightly from 5.8% in 2024 to an estimated 4.8% by the end of 2025, lending remains selective and cautious. Many deals fail to meet lenders’ criteria, particularly for secondary stock.

Looking Ahead: Budget Impact and Market Outlook

The outcomes of the upcoming Autumn Budget will be pivotal. Changes to business rates, property taxes, and infrastructure spending could either stimulate or further suppress the market. Green incentives for EPC upgrades may add value to retrofitted assets, potentially encouraging investment.

However, current sentiment remains subdued, with many awaiting policy clarity before committing capital. The commercial property market is not collapsing but returning to fundamentals, with opportunities for landlords who plan strategically and manage risks effectively.

Conclusion

Uncertainty around the Budget and rising debt costs have stalled the UK commercial property market, creating a challenging environment for landlords and investors. Prime, sustainable assets continue to attract interest, while secondary properties face increasing difficulties. Landlords who proactively manage their portfolios, focus on compliance, and engage with lenders will be best positioned to navigate this two-speed market.

Keywords: commercial property market, investor sentiment, occupier sentiment, Autumn Budget, business rates, Stamp Duty Land Tax, capital gains tax, ESG compliance, energy performance, leasing incentives, refinancing, UK landlords