Economic Market Update

The UK economy is somewhat of an enigma at the moment. Headlines suggest that times are troubled and this winter we could see higher inflation, higher interest rates, and perhaps even higher taxes. Yet the underlying economic data – even after seven months of disruption to global energy markets from the Iran war - has remained surprisingly good.

Consumer confidence, after falling sharply from February to April, had bounced back to a two-year high in September. Business sentiment has held up, and the flash PMIs for September indicate a solid if unexciting pace of expansion across both manufacturing and services industries. The labour market – admittedly only providing a heavily lagged picture – indicates employment rising and the unemployment rate steady over the three months to June, albeit amid a fairly low job vacancy rate. Even nominal wage growth is well above 3% meaning (for now, at least) increasing consumer purchasing power. GDP growth in Q2 came in at a respectable 0.4% quarter-on-quarter, and the monthly measure for July suggests this momentum has been maintained into the start of Q3.

But economic concerns also have a basis: petrol and diesel prices are pushing all-time record highs, energy bills are rising, and inflation is increasingly widely forecast to top 4% - a level at which the Bank of England believes second-round effects kick in and which makes inflation running out of control more likely. There is no end in sight to the war in Iran, and the government is rightly pointing out how little fiscal headroom they have as globally rising bond yields turbo-charge government debt servicing costs. We may or may not see tax rises in the Budget on the 28^th, but we are certainly not going to see any sizeable giveaways either.

The upshot is that the outlook for the UK economy is on a knife-edge: if energy prices decline, they will take with them the risk of higher inflation and reduce the probability of any rate hikes. This would boost the growth outlook and cancel some of the headwinds facing consumer spending. If energy prices remain elevated or rise further, then we face the risk of rising inflationary pressure, rate hikes to keep inflation in check, and falling growth as household and business discretionary spending is squeezed tight. 

Our latest Capital Markets Review and Outlook examines investment activity in H1 2026 and prospects for the year ahead, incorporating insights from our investor survey conducted in August. The survey reveals cautiously optimistic sentiment towards UK commercial real estate, with 65% of respondents finding the UK attractive or holding neutral views compared to other major global markets, while London commands stronger confidence with 78% rating it favourably against other major cities.

Strategic positioning is evident in investor behaviour, with 56% holding assets somewhat or significantly longer than originally intended and only 9% planning earlier exits. This suggests investors are waiting for improved pricing as market conditions strengthen, potentially creating a substantial pipeline of quality assets as valuations stabilise.

While 69% of investors identify geopolitical events as the greatest risk factor, representing a fundamental shift from previous cycles where financial factors dominated, many are becoming more comfortable underwriting this volatility. 

Despite intense focus on AI, UK occupiers' top CRE priorities remain fundamentally unchanged: reducing costs, optimising space utilisation, and increasing organisational efficiency. AI isn't replacing these strategic fundamentals—it's transforming how quickly organisations achieve them and how rapidly market conditions evolve during execution.

Looking ahead, UK occupiers are prioritising quality, experience, and long-term transformation over short-term cost minimisation in their CRE investment decisions. This signals organisational aspiration toward premium, tech-enabled, experience-rich portfolios designed to attract talent and enhance productivity.

Workforce dynamics reflect cautious optimism despite uncertainty. 59% of UK organisations anticipate net headcount expansion, with equal proportion prioritising full-time employment. Significantly, 53% expect AI to fundamentally redesign human roles, shifting performance evaluation from hours worked (33%) to quality of output (67%). This evolution underscores how AI influences not just workplace strategy, but the entire relationship between space, technology, and human performance in the modern enterprise.

London Office

Take-up for July and August reached approximately 1.8 million sq ft across Central London, representing a 22% increase on volumes recorded during the same period last year. There was a notable recovery in the number of large transactions, with three deals in excess of 100,000 sq ft completed, compared to just one recorded in the entirety of Q2. September added further momentum, with trading firm Jane Street pre-letting 465,000 sq ft at One Spitalfields, the largest off-plan pre-let in the City in over a decade.

Regional Office

Prime rental growth is expected in Q3 with a number of the Big 6 markets anticipated to see prime rents moving upwards, as the ongoing supply shortage, especially in terms of new build space, maintains the pressure. 

Industrial & logistics

According to the ONS, online sales stood at 27% of total retail in August. Continued consumer demand is driving e-fulfilment warehouse requirements, with preliminary estimates suggesting e-commerce could account for around one-third of big box take-up in Q1-Q3 2026.

Retail

Retail momentum continues to strengthen, with July retail sales values growing 3.8% year-on-year, driven notably by in-store sales as online penetration declined to 28.3%. Physical stores are generating more sales than ever before, with sales per occupied square foot reaching record highs in Q2 2026, while consumer confidence has climbed to a two-year high in August.

Living

Our UK Seniors Housing Report 2026 dives into how the UK seniors housing sector has delivered half the number of new homes it has needed to keep up with the country's ageing population over the last 20 years. With provision rates declining and development activity down one-third over the past five years, a significant supply gap is leaving older people with fewer age-appropriate housing options.

Hotel

The UK hotel sector continues to perform well in 2026, with occupancy levels holding steady at 76.4% and average room rates increasing by 2.1%. Despite ongoing cost pressures and increased business rates, operators are successfully managing expenses, with profit per available room growing 2.8% year-to-date.

Data Centres

Major regulatory developments in recent years are fundamentally reshaping European data centre development. In the UK, the grid queue has exploded from 45 GW to 125 GW in under a year, with speculative data centre projects largely driving this growth. Ofgem's consultation proposes commitment fees as credit security at Gate 2 connection, requiring developments to meet strict timelines to retain their connection date.

Life Sciences

Federated Hermes has brought its 50% stake in the £800m Milton Park innovation park to market in a rare opportunity to access Oxford's life sciences and technology ecosystem at scale. The 302-acre park houses over 280 occupiers across 2.9m sq ft, including 638,000 sq ft of lab space, with ring-fenced power capacity and a streamlined planning process delivering approvals in just 10 days.

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