The SME commercial real estate market steps up in 2026

Covid devastated the small enterprise section of the commercial property market. Are we at last seeing signs of recovery?

Two years ago, we wrote about the difficulties facing the UK's SME commercial real estate sector. At that time, the outlook was challenging, with a real prospect of widespread distress. We likened the market to a line of dominoes standing on end, vulnerable to a combination of rising interest rates, stubborn inflation, falling property values and liquidity constraints for both lenders and borrowers.

The market looks markedly different today. Conditions remain challenging in places, but there are growing signs of recovery and renewed confidence. Rather than watching dominoes fall, we are seeing the emergence of stepping stones towards a more stable and active market.

From falling dominoes to solid stepping stones

The commercial property market is highly sensitive to interest rate movements, and the Bank of England base rate has fallen from 5.25% to 3.75% since mid-2024, providing a welcome boost to activity across the real estate sector. Lower borrowing costs have improved sentiment and created opportunities for both lenders and borrowers.

One consequence has been a significant increase in refinancing activity at more attractive rates. In the bridging market, larger facilities are being used to refinance sites earmarked for future development, while smaller transactions, typically up to £1 million, are increasingly focused on refurbishment projects and HMO conversions. Within the development finance market, lender appetite has strengthened, particularly for accommodation-led schemes and new housing projects where underlying demand remains robust. Lenders are also showing renewed willingness to look beyond straightforward assets, with mixed-use schemes and permitted development conversions attracting more serious interest, provided the fundamentals and exit strategy stack up.

Brexit and Covid-related disruption no longer occupy the same position in commercial property decision-making that they once did, although political uncertainty, elevated construction costs and continuing cost of living pressures remain significant considerations for developers, investors and lenders alike. These challenges are far from insignificant, but well-positioned projects continue to attract funding and buyer interest.

Liquidity has also improved. Distressed and stranded assets that were once difficult to refinance or dispose of are increasingly being brought back into productive use, whether through refinancing, repurposing or outright sale, although some continue to sit in limbo awaiting a viable solution. Where legacy schemes have stalled, we are increasingly seeing a pragmatic mix of solutions, from consensual sales and negotiated standstill arrangements through to, in a smaller number of cases, insolvency processes used to bring a scheme back to a deliverable footing under new ownership.

At the same time, more funders are allocating capital to SME commercial property, either directly or through specialist asset managers. This has contributed to greater market activity and improved liquidity, even if equity remains relatively scarce. The increasing participation of private capital has been particularly important in helping to restore confidence to parts of the market that had previously struggled to attract funding.

Much of that capital is being deployed through joint ventures and mezzanine finance structures, particularly within the development sector where viability appraisals often remain stretched. This reflects the continuing cost pressures faced by developers, but it also demonstrates the willingness of the finance market to provide creative solutions where traditional funding alone may no longer be sufficient. These structures bring their own complexity, and getting the documentation right, particularly around profit share, control provisions and exit mechanics, is critical to avoiding disputes further down the line.

As non-bank lenders continue to expand their presence in the commercial property market, we are seeing other encouraging developments. One is the more prominent use of fintech in underwriting and credit decisions. This, in turn, is leading to increasingly data-driven lending decisions as technology becomes more accessible and cost-effective. In a market where speed and accuracy can make the difference between securing or losing an opportunity, the ability to analyse risk and make informed decisions more efficiently is becoming a significant competitive advantage.

Reasons for optimism, not complacency

The market today is undoubtedly healthier, but that should not be mistaken for a return to the conditions of the previous low-interest-rate era. Borrowing remains more expensive than many investors and developers became accustomed to during the preceding decade, and viability challenges continue to affect a wide range of projects.

For lenders, the focus remains firmly on quality, delivery capability and realistic exit strategies. For borrowers, the importance of careful planning, robust due diligence and proactive engagement with funding partners has arguably never been greater.

What has changed is that there are now more options available. Refinancing opportunities have improved, alternative capital is more active and lenders are demonstrating a greater willingness to support viable projects. In many cases, the conversation has shifted from managing immediate distress towards identifying opportunities for growth and recovery. That shift is also reflected in the type of instructions we are seeing, with a noticeable rise in acquisition and refinancing work compared with the restructuring-heavy instructions that once characterised the market.

Getting the right advice

Against this backdrop, lenders and borrowers alike should continue to take a proactive approach to managing risk and pursuing opportunities. The commercial property market remains complex, and navigating changing funding structures, evolving lender requirements and market uncertainty requires careful planning.

Engaging experienced legal advisers allows all parties to make informed decisions and protect their interests at every stage of a transaction. Whether dealing with refinancing, restructuring, development finance or investment acquisitions, obtaining the right advice at the right time can help avoid costly mistakes and improve the prospects of a successful outcome. This is particularly true where transactions involve multiple funding layers or competing priorities, where clear documentation and early identification of potential pinch points can be the difference between a scheme progressing smoothly and one becoming bogged down in dispute.

While there is no single solution to the challenges facing the sector, there are clear signs that the market is moving in a more positive direction. Those who remain adaptable, commercially focused and well advised will be best placed to take advantage of the opportunities emerging across the SME real estate landscape.

About the Author: James Dakin is a finance expert who acts for a number of big banks and institutional borrowers and more recently has worked with private firms and start-ups involved in commercial property and its funding.

About Newmanor Law: Newmanor Law is a specialist real estate law firm, combining fresh technology with legal insight, working with property professionals on acquisitions and sales, construction matters, development, property disputes, and landlord and tenant matters, along with debt finance and tax matters relating to property.

[Main image credit - Fauxels]