Middle East conflict is freezing the UK commercial property market 

Uncertainty pervades the market as investors put decisions on hold…

After the economic shocks of previous years, Brexit, Covid and two of Labour’s taxing Budgets, 2026 started with a hint of optimism. There was a cautious sense that the UK property market might finally be turning a corner. Inflation was on a downward trend, interest rates appeared to be stabilising and coming down, and investors were beginning to take up deals. 

The narrative has been rudely interrupted

The Middle East conflict suddenly escalated into something few had imagined: it has injected a layer of uncertainty into global markets. With an already weak economy, the UK commercial property sector has responded in a typical way, not with panic, but with a serious hesitation.

Transactions are put on hold while investors reassess the scene. What was looking like the early stages of a UK economic recovery is now in doubt, so better to wait and see how the events in the Middle East play out.

The market has not collapsed. But it is clear, the previous momentum has slowed as the recent changes affecting landlords and investors has made them sit on their hands.

A distant conflict has its impact

Property markets are a large part of the UK’s wider economy; they don’t operate in isolation. The sector is highly sensitive to macroeconomic changes, in particular inflation, interest rates, and consumer confidence. The current geopolitical conflicts feed instability into the system and affect all three of these.

The first and most important impact is on energy. The Middle East conflict has pushed energy markets back into volatility as oil prices spike upwards and react to every piece of news coming out of the war.

With UK energy prices already some of the most expensive in the world, all this feeds into broader inflation. As spot market fuel prices take a hit and bond yield increases, there is an immediate impact on business costs, and the cost base for both landlords and occupiers. 

Most commercial property tenants, from offices, retail, leisure and industrial are already operating on tight margins. They face rising overheads with recently increased taxes – NIC and business rates - while landlords are experiencing upward pressure on maintenance costs. Consequently, there’s a knock-on effect to tenant service charges.

Inflation expectations have reversed, shifting once again to an upward trend, with the outlook pointing to higher interest rates.  The generally accepted view that interest rates would fall steadily through 2026 is now in doubt, unless this conflict is not resolved quickly. Markets have no choice but to price-in a “higher for longer” interest rate scenario.

These matters have an enormous effect on the UK’s commercial property market. Higher interest rates increase borrowing costs, they will suppress investor’s returns. At the same time, safe alternative assets – cash and bonds – look more attractive.

Even where deals remain attractive and viable on paper, caution dictates that investors take a step back and pause for now. Most are adopting a “wait-and-see” approach, delaying acquisitions and developments until there is more clarity.

The market has paused, not stopped

The polarisation of investible assets has, since Covid, been a running trend. Investors are becoming selective in the assets they target. They are focusing on prime assets of every class, those that offer income security. Secondary, non-energy regulation compliant buildings are facing downgrading and obsolescence.

While office and retail investment decisions are being delayed, some sectors, such as logistics, warehousing, and data centres, are managing to maintain some underlying strength. This is due to a structural shift in the economy to e-commerce and the AI-related demand now coming through.

Banks are tightening their lending policies in the face of economic uncertainty. Some are pausing or reconsidering rate reductions for commercial borrowers, while on the residential front, hundreds of mortgage offerings have been withdrawn in recent days.

London a prime example

The latest research from BPS London has revealed that just 18.2% of commercial property opportunities currently listed for sale across London have secured a buyer. This highlights the highly selective investment landscape across the capital.

BPS London analysed current commercial property listings across London, assessing the proportion of available opportunities that have already attracted investor interest, alongside how demand varies across each commercial asset class.

The analysis shows that, overall, just 18.2% of commercial property opportunities across London are currently under offer or sold subject to contract, demonstrating that while investor appetite remains present, it is being deployed far more selectively across the market.

However, the level of demand varies considerably by sector. 

According to BPS, leisure assets are currently seeing the strongest investor appetite, with 75.0% of available opportunities having secured a buyer, followed by specialist assets at 54.2%. Build-to-rent opportunities have also seen relatively strong demand at 30.0%, while hospitality assets stand at 23.1%.

More traditional commercial sectors are seeing measured levels of demand. Retail assets, which account for the largest proportion of available stock at 44.5%, have seen 19.7% of opportunities attract investor interest, while industrial assets stand at 16.0%.

 In contrast, office space is currently seeing lower levels of investor demand, with just 14.7% of available opportunities under offer, despite accounting for 33.6% of all commercial stock currently listed for sale across the capital.

According to BPS London, this imbalance reflects a shift in how commercial space is being utilised, rather than any fundamental lack of long-term confidence in the office sector itself.

The office sector is a prime example of this shift in preferences as, while demand for physical workspace continues to return, occupier expectations have evolved significantly, with greater emphasis placed on flexibility, design, amenities and the overall workplace experience.

As a result, a large proportion of existing office stock no longer aligns with modern requirements, creating a disconnect between supply and investor demand and presents a clear opportunity for developers capable of repositioning well-located assets.

Mahir Vachani, Director at BPS London Developments, says:

“What this data highlights is just how selective the market has become. Investors are no longer taking a broad approach across commercial property; they are targeting specific sectors and assets that align with long-term demand.

“At the same time, the office sector is undergoing a period of transition. It’s not a question of whether offices are needed, but whether the existing stock meets the expectations of today’s workforce, which have shifted significantly in recent years.”

The cost of debt

For investors, the cost of debt is the main issue right now. It translates into a challenging financing environment. Refinancing risk is back on the agenda, particularly for those who took on debt during the ultra-low-interest rate era, not that long ago. 

Development finance has also become harder to secure. With lenders wary of the current economic uncertainty, construction cost inflation, and uncertain end values means decisions have stalled.

For smaller landlords, the impact is even more direct. Higher borrowing costs erode cash flow, reduce interest cover, and limit the ability to expand portfolios. In some cases, this environment could force disposals.

The predictable result is delay. Projects are being shelved, scaled back, or reappraised. Speculative development is becoming harder to justify. While this is negative in the short term, it has a potentially positive implication for the medium term. Reduced development today means constrained supply tomorrow, which can support rental growth once demand stabilises.

Uncertainty creates opportunity

Markets abhor uncertainty and the current environment has plenty of it. 

Yet history tells us that these situations often create the conditions under which the best opportunities emerge. Whether it was Brexit, a world-wide pandemic, or the 2022 Mini-budget, these events created windows of opportunity where some assets could be acquired at very attractive prices and yields. Those with the capital, the conviction, and a long-term perspective are often able to benefit.

But for the adventurous and unwary, this is not a market for gung-ho decisions, selectivity is critical. The gap between strong and weak assets is widening, and mistakes are likely to be punished severely.

What does it mean for landlords?

For landlords, yet another crisis means a slower, more demanding market. Transactions will take longer, financing will be tighter, and tenants will be put under greater pressure. 

The focus should be on asset quality, meeting compliance standards, income resilience, and tenant strength. Prime assets with strong fundamentals that meet the requirements for modern business tenants will continue to attract demand. Secondary assets without a clear repositioning strategy may well struggle.

Debt should be managed carefully. The era of cheap debt is over, at least for now, and overexposure to rising interest costs not only erodes cash flow, but it also threatens solvency. 

Landlords need to prepare for the long haul in case this Middle East war continues for some time. The commercial property market is not broken and good businesses will survive, but there is a repricing risk. Those who understand that, and adjust accordingly, will be best placed to navigate what comes next.

[Main image credit: Pixabay]