What a difference an interest rate cut or two can make. As 2024 drew to a close, the commercial property market was wracked with uncertainty, but a few months into 2025, the outlook appears brighter. But investors still have to tread carefully.

What is driving new commercial property market optimism?

Buoyed by an upturn in investment levels in late 2024 and two significant changes to the base interest rate, commercial property market forecasting has become more optimistic in recent months, with predictions of a notable shift in market dynamics.

Yet, for the all talk about a change in how bedrock sectors are going to perform, the growth engine for the commercial property market remains very much the same. Industrial and logistics is set to continue to be primary source of growth going forward, reflecting a longer-term shift in market look and investor activity. The ongoing solidity in fundamental e-commerce and online shopping trends is integral here.

That said, as the industrial and logistics market matures, it is not without its challenges, including rising operating costs. As a result of this pressure, and ongoing trends for optimisation and future-proofing supply chains, activity may be centred increasingly in dedicated sites, which have been developed around connectivity and sustainability.

Is a long-awaited upturn in store for some traditional property sectors?

While industrial and logistics will remain the principal growth engine, in a change to recent years, the market should see greater diversification in terms of growth provision, in particular in relation to the residential space, and to a lesser extent in the retail and office sectors.

With regard to the residential space, the recent interest rate cuts are significant to this outlook, along with the marked change in government policy on housebuilding, with a renewed emphasis on increasing construction. Underlying it all is the fact that demand continues to outstrip supply.

Away from residential, the revival of retail is being widely predicted. While the sector seems to be borrowing a bit from industrial and logistics, with retail warehousing being talked up as a key growth driver, prime shopping centres, substantial high streets parades and prime space in out-of-town locations are being flagged as key buys for 2025.

There is also more positive talk about office space. Notably, demand for high-quality, sustainable office buildings is likely to frame both sector development and growth in 2025, as well as the growing importance of prime space, in particular in key city markets. That said, limited stock should drive wider sector growth, with the slow but significant move away from remote working potentially a key trend.

Where to look in the alternative commercial property space in 2025

Looking beyond traditional market spaces, 2025 looks set to witness the ongoing growth of the alternative commercial property sector, with non-traditional spaces continuing to offer investors good deals. Purpose-built student accommodation, data centres and life-sciences should be hot spots.

Notably, with regard to data centres, momentum is set to continue to build, with the sector expected to grow strongly in 2025, driven by demand for cloud and artificial intelligence services, and the overall ongoing expansion of the digital economy.

What key trend will frame market development and value in 2025?

Across the commercial property board, sustainability and green financing will underpin the development of the market through 2025, dictating the look and performance of key sectors and where investment is targeted.

The attraction and greater profitability of energy-efficient units, renewable energy frameworks and greener construction practices should become increasingly apparent during the year, both in terms of meeting customer expectations and regulatory requirements.

Optimism but uncertainty – what is behind the split outlook?

Clearly, there is lot more optimism around the commercial property market as Q2 rolls into view – the change in sentiment from the end of 2024 is notable. However, for all the positive predictions, challenges remain, including risks to growth.

Notably, as reported in a number of places, there is likely to be a mismatch in buyer and seller expectations, a symptom of the state of the market in recent years, which with a few exceptions, has been hit hard by global headwinds and domestic self-sabotage.

There is also the smaller matter of the uncertain geopolitical landscape. At present, it is a day-to-day rollercoaster ride, and this uncertainty and instability necessitates that some caveats are attached to growth predictions, even in the short term.

What this mixed forecast means for commercial property finance

Against the background of growing optimism and continued uncertainty, it is clear that demand will remain strong for flexible and short-term commercial property investment financing, including alternative finance. As such, your choice of commercial loan and mortgage provider will continue to be critical during 2025.

To find out more about A&T Business Associates services for commercial property investors, contact Tony Hedger on 01903 602211 or tony.hedger@atbusinessassociates.co.uk.