CBRE is anticipating a continuing economic rebound in 2025, creating an opportune moment for investors, according to the firm’s UK Real Estate Market Outlook 2025.
Inflation fell in the first quarter of 2024 and was near, or at target, for the rest of the year. The Bank of England began its interest rate cutting cycle and, overall, the economy grew by around 1%.
With a more stable backdrop, CBRE forecasts the economy’s growth trajectory to continue into 2025, boosted by further interest rate cuts.
At a real estate level, CBRE’s Head of UK Research Jennet Siebrits anticipates improved performance across all property segments with an increase in investment volumes.
“As we close 2024, it is becoming increasingly evident that the market reached a trough this year. All property capital values are showing early signs that they’ve reached a turning point, which is expected to gather momentum throughout the year ahead. We also anticipate a compression in yields in early 2025, driven by continued modest interest rate cuts,” Siebrits said.
“Our forecasts indicate competitive returns across all property segments, with prime assets expected to deliver the strongest performance. As we leave a year where investment volumes remained at historically low levels, a rise in values, alongside lower interest rates and cost of capital, will stimulate a pick-up in investment of around 15%. Consequently, 2025 is shaping up to be a pivotal opportunity for investors.”
With public net zero carbon targets rapidly approaching, occupiers, landlords, investors and lenders will need to have greater alignment on sustainability objectives, presenting opportunities for collaboration. CBRE anticipates a greater focus on both transition and physical climate risks in transactions, budgets and valuation. Investors and developers are also increasingly aware of the need to mitigate against physical risk. In the UK, one in six properties is at risk of flooding, with an annual remediation cost of £1bn.
The use of Artificial Intelligence (AI) in commercial real estate is expected to become more mainstream in 2025. In the medium-to-long-term, the industry is likely to realise substantial benefits from adopting AI into business practices. In the short-term, data centres are poised for transformation; the expansion of AI is driving a significant increase in demand for capacity and evolving requirements to reflect the computational and storage needs of these applications.
Overview of key sectors:
Office
CBRE anticipates ongoing growth in office take-up in 2025, driven by an improved macroeconomic backdrop and a projected increase in office-based employment. Due to high construction costs and limited debt availability, Grade A office supply remains constrained across the UK. CBRE forecasts prime rental growth of approximately 6% across most UK markets in 2025. The expansion of the flexible office market is set to continue in the larger UK cities, attracting a diverse occupier mix.
Industrial & Logistics
With a stable economic backdrop, CBRE expects occupier activity in 2025 to remain consistent with the levels seen this year. Given steady occupier demand and a reduced development pipeline, the industrial & logistics vacancy rate will continue to stabilise throughout 2025. Prime rents will continue to grow, albeit at a more modest pace than seen in recent years. The flight to quality is expected to continue as caution surrounding assets’ obsolescence grows. Building on a healthy market for smaller assets, there will also be increased demand for larger lot sizes.
Retail
CBRE expects modest sales growth in 2025, driven by an increase in real household income and further interest rate cuts. Online sales penetration will continue to grow organically but retailers’ introduction of online return fees may temper this growth. Physical retail will remain a core component of occupiers’ business strategies. Prime space will become increasingly scarce in the year ahead, resulting in continued rental growth in the most attractive locations. Retail Parks are expected to lead investment in the sector in 2025 and for occupiers, prime Central London assets will continue to appeal.
Residential (Build-to-Rent)
Demand for rental accommodation will remain strong in 2025. However, supply challenges remain, compounded by the Renters’ Rights Bill and the additional 2% stamp duty surcharge on second homes announced in The Budget. The Build to Rent pipeline has diminished in recent months as developers face a combination of challenges including higher financing costs, prohibitive planning environments and building safety legislation. As a result, CBRE predicts the demand and supply imbalance to persist in 2025, underpinning rental inflation.
Purpose-Built Student Accommodation (PBSA)
The rapid growth of the student age population, along with a forecast recovery in non-EU students choosing the UK for further education, will drive strong demand for PBSA in 2025. Upcoming caps on student numbers in countries including Australia and Canada will also create additional demand to study in the UK. The supply of PBSA will continue to be constrained by several factors, resulting in an estimated shortfall of 620,000 beds across the UK in 2025. Occupancy is expected to remain strong in the year ahead, but some markets with higher levels of supply will be more price sensitive. Overall, rental growth is expected to remain robust across the sector.
Hotels
Tourism has exceeded pre-pandemic levels in both London and the regions this year, in what has been a welcome boost for the sector. CBRE expects to see higher levels of inbound overnight stays in 2025, particularly in London, which will continue to cement its reputation as a global destination for business, entertainment and events. Interest rate cuts in the second half of 2024, and the prospect of further cuts in 2025, have boosted hotel investor sentiment. CBRE anticipates a fluid and active investment market throughout the year as demand for hotel real estate continues to be at the forefront of investors’ strategies.
Self Storage
Self storage will continue to produce robust operational performance, driven by growth in both consumer and business awareness levels and improved economic conditions. Investor appetite remains strong, with development costs stabilising. CBRE anticipates increased levels of supply as a response to the growth ambitions of many players in the sector, combined with the amount of equity targeting this segment.
Data Centres
The data centre market in the UK is set to continue its impressive growth trajectory in 2025, notably in London, which accounts for approximately 80% of the UK market. Despite challenges in delivering new facilities, London’s data centre supply is projected to increase by 17% to meet demand from a growing number of hyperscalers and AI providers. With strong demand and limited space, availability in London is expected to decline for the fourth consecutive year in 2025, keeping the vacancy rate below 10%, an historically low figure.
Life Sciences
Venture Capital funding is forecast to increase in 2025. This is expected to drive demand for lab and office spaces as companies seek growth opportunities across the UK. Approximately 2.4m sq ft of new lab space is set to enter the market in 2025 to help alleviate the supply/demand imbalance and strengthen existing ecosystems. The investor market is anticipated to pick up, with a flurry of opportunities emerging as a number of life science developments near completion.
Siebrits concluded: “There were ups-and-downs in 2024, but a number of asset classes performed exceptionally well. As we look to 2025, well-located, prime offices stand to benefit from projected job growth, while both the retail and logistics sectors are poised to thrive amidst rising consumer demand. Demand for data centre capacity is expected to skyrocket, with development accelerating in London.”
Read the full report
