March 19, 2025
The UK’s commercial property market has faced a challenging landscape in recent years, with interest rates playing a significant role in shaping investment decisions. As interest rates remain high compared to historical lows seen in the past decade, investors are re-evaluating their strategies to adapt to changing market conditions.
However, with interest rates now starting to come down and further reductions expected, the outlook for commercial property investment is beginning to improve. The latest data from Rightmove, the UK’s leading commercial property website, shows a surge in demand for commercial property investment compared to the same period last year, driven by falling interest rates following the second Bank Rate cut.
The impact of higher interest rates
1. Reduced borrowing power
One of the most immediate effects of rising interest rates is the increased cost of borrowing. Commercial property investors who rely on financing to fund acquisitions are finding that higher mortgage rates make it more expensive to service debt.
This has led to reduced purchasing power, forcing investors to either put deals on hold or seek alternative financing options. However, as interest rates begin to decline, borrowing conditions are expected to improve, potentially unlocking more opportunities for investors.
2. Falling property values
Higher interest rates often result in a downward pressure on commercial property values. As borrowing becomes more expensive, demand for investment properties declines, leading to softer pricing.
Some landlords who need to refinance are also facing difficulties, with valuations coming in lower than expected, affecting their ability to leverage existing assets for new purchases. However, as rates decrease, property values may begin to stabilise, leading to renewed investor confidence.
3. Shift in investor preferences
Investors are becoming more selective in the types of commercial properties they target. Sectors such as logistics and industrial properties, which have shown resilience due to e-commerce growth, continue to attract interest.
Offices are starting to gain popularity again as more companies encourage employees to return to the workplace. Prime office locations with high-quality amenities are seeing renewed interest, making them an increasingly attractive investment option. Find out more about UK office space trends.
Opportunities in a changing interest rate environment
Despite the challenges, opportunities still exist for savvy investors. Those with strong cash reserves are in a better position to negotiate deals without the constraints of expensive borrowing. Additionally, distressed assets may become available at attractive prices, presenting opportunities for long-term growth.
Furthermore, landlords who focus on high-quality, well-located properties with strong tenant demand are more likely to weather the storm.
What’s next for commercial property investors?
With interest rates now on a downward trajectory and expected to fall further, the commercial property market may see renewed activity in the coming months. Investors should remain cautious but also be prepared to take advantage of improving borrowing conditions and stabilising property values.
At Jacobs Steel, we understand the complexities of the commercial property market and are here to provide expert guidance. Whether you are looking to find the right commercial property for your business, maximise your commercial property’s rental income, or optimise your investment strategy, our team is on hand to help you navigate these changing conditions with confidence.