Economic Market Update

The economic story for the last six months has been one of concern that the war in Iran and closure of the Strait of Hormuz would take an increasing economic toll the longer it went on. Whilst this narrative is still broadly true – and the running down of strategic energy reserves can only go on so long – the economic impact has not materialised as expected.

In fact, the UK economy has shown a surprising amount of resilience. Q2 GDP grew by 0.4% quarter-on-quarter. Whilst slower than Q1’s outturn of 0.6%, this is still a strong result. Growth was driven by consumer spending and business investment, both of which look like they should move strongly into the third quarter.

For starters, the labour market appears robust. Unemployment has held firm at 4.9% for the last few readings, the job vacancy rate has been stable, and wage growth has picked up, in both nominal and real terms even as inflation has remained high. Consumer confidence bounded upward in both July and August to the highest level since 2024. Perhaps the warmer weather has boosted spirits. Certainly, it kept spending growth solid and the World Cup may have provided a boost too.

As for businesses, sentiment has remained solid, broadly unchanged around a very slight upward trend. The PMIs also indicate a steady pace of expansion across both the manufacturing and services sectors, the latter of which has seen a rebound from sub-50 readings (indicating contraction) in May and June, to 52.8 for the flash August reading.

Forecasts for GDP growth this year, after being revised down following the outbreak of war in Iran, have been revised back up to where they started the year. The outlook for inflation has also been revised up, but not by as much as expected, leaving forecasts for interest rates currently settled at On Hold for the rest of the year. Of course this can change, and market expectations for rates are shifting continuously. In January two cuts were priced in for 2026, now there are none and there is debate about whether the next move by the MPC may be upward. For now at least, the status quo prevails.

The UK market continues to demonstrate resilient performance, with broader uncertainty and volatility an increasingly embedded feature, which businesses are understanding and underwriting. Investors are actively deploying capital with confidence, demonstrated by international buyers maintaining their 46% share of market activity. Rather than pausing for perfect conditions, the market is moving forward, highlighted by robust fundamentals and sustained demand for quality assets across key sectors.

Looking ahead, our latest investor survey confirms this shift as 64% view the UK attractively or neutrally versus global markets, rising to 58% for London, demonstrating that capital allocation decisions are now being made within volatile conditions. Investor behaviour reflects strategic conviction rather than caution, with 62% holding assets longer than originally planned to capture improved pricing as the market strengthens. Notably, geopolitical risk (38%) has overtaken interest rate concerns (28%) as the primary focus, while sustainability considerations have directly influenced 56% of recent transactions, creating a clear divide between ESG-compliant assets and those facing retrofit challenges. With improving political stability, strong sector fundamentals and the flight to quality assets, the market is positioned to deliver sustained performance through volatility into 2027.

While investors have adapted to navigate volatility through selective capital deployment, occupiers face more direct exposure to geopolitical disruption through physical supply chains and construction costs. The UK construction cost outlook has worsened since the start of 2026. JLL's Tender Price Index forecast has expanded from a single-point estimate of 3.5% to a wider range of 2.8–4.5% for the year, reflecting heightened uncertainty. This revision stems primarily from geopolitical disruption—notably the ongoing Middle East conflict and the closure of the Strait of Hormuz—compounded by new UK steel trade measures that took effect on 1 July 2026. These factors have reignited inflationary pressure across key construction materials and energy inputs.

Material costs are rising once again after a two-year period of relative stability. Between January and May 2026, steel, glass and cement prices climbed 5–7%, while copper remains at elevated levels driven by sustained demand from data centres, electric vehicles and national grid infrastructure upgrades.

Meanwhile, construction activity remains subdued. Contrary to expectations at the start of the year, financing conditions have not eased—the Bank of England has held Bank Rate steady at 3.75% since December, removing a key catalyst for development finance. New works output continues to contract across all UK regions, with overall sector growth sustained only by repair, maintenance and renovation work rather than fresh development pipelines.

Unlike investment markets where capital can wait for optimal entry points, occupiers must respond to immediate operational needs within constrained timelines. In this environment, success will favour organisations that embed scenario planning into capital strategies, engage supply chains and project advisors early, and strengthen procurement due diligence to manage risk effectively.

London Office

Prime rents in the West End core rose to £190.00 per sq ft in Q2, up from £165.00 per sq ft in Q2 2025. This upward movement has been driven primarily by intensifying supply constraints, particularly evident in Mayfair, where a limited speculative development pipeline continues to exert pressure on rental levels.

Regional Office

Grade A vacancy across the Big 6 stands at just 3.1%, with new build availability at an exceptionally tight 0.8%. Birmingham and Leeds have recorded 14-15% annual rent growth, and ongoing supply constraints are set to drive continued rental momentum through H2.

Industrial & logistics

Leasing activity in the big box market recorded a strong first half, with Grade A take-up involving units of 100,000 sq ft+ totaling 12.9 million sq ft in H1 2026, 3% up on H1 2025

Retail

Retailers are reimagining stores beyond traditional sales, leveraging them for cost-effective fulfilment, retail media, and customer data monetisation. With physical spending forecast to grow 3.3% annually through 2030 and outpacing new supply, this evolution is driving rising sales densities and fundamentally strengthening the case for quality retail assets.

Living

Investor appetite in living is increasingly focused on income-producing assets, with multifamily acquisitions dominating at two-thirds of BTR transactions, the highest share since single family emerged as a sector force in 2023. 

Life Sciences

GSK has confirmed a £400 million investment to establish a major new global research and development (R&D) centre on Discovery Drive at the Cambridge Biomedical Campus.

Data Centres

Power availability now defines UK data centre viability, with 140 projects competing for 50 GW of grid capacity. New regulations requiring proof of land control, planning progress, and financial backing before connection approval mean energy strategy has become a commercial differentiator, concentrating development around established locations with proven infrastructure access.

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