Economic Market Update

The UK economy enters the month of May with a very different view ahead of it than behind it. Looking backwards, data has surprised to the upside, pointing to a stronger-than-expected start to the year. Yet looking ahead, conflict in the Middle East has injected substantial uncertainty.

Unemployment edged down to 4.9% in the three months to February 2026, from 5.2% previously. The reality is more nuanced: lower unemployment coincided with a rise in economic inactivity, as more people exited the labour force. Vacancies continued to fall to 711,000 in January–March 2026, the weakest reading post-pandemic. Earnings growth was 3.8% in the three months to February, meaning real wage growth is now only modest. Overall, labour market data points to a gradual softening in conditions, with hiring intentions weak and employers citing the April uplift in National Insurance contributions as a headwind.

Meanwhile inflation is on the rise. CPI inflation rose to 3.3% in March, up from 3.0% in February, driven in part by transport costs and energy-related prices. Motor fuels made the largest upward contribution, with petrol prices rising sharply between February and March. Services inflation, which the BoE tracks closely to monitor domestic price pressures, ticked up to 4.5% from 4.3%. Inflation is now well above the MPC’s 2% target, and the Bank has indicated it now expects CPI to remain between 3% and 3.5% in Q2 and Q3, significantly up on its pre-conflict projections.

Overall activity has been pretty robust in the year so far. Monthly GDP grew by 0.5% in February driven by services and production, with construction remaining a drag. On the rolling three-month measure, GDP rose 0.5% in the December–February period compared to the prior three months. Composite PMI rebounded to 52.0 in April from 50.3 in March, with both manufacturing (51.8) and services (52.0) expanding. Whilst this is encouraging, respondents noted that some of the manufacturing strength reflected clients frontloading orders ahead of anticipated war-related supply disruptions rather than genuine underlying demand.  The Middle East conflict is likely to exert a sizable drag on the UK relative to other major European economies due to its reliance on imported fuel and pricing dynamism. The Consensus Forecast for GDP growth in 2026 has been revised down from 1.0% as of January to just 0.6% in April’s survey.

Turning to interest rates, the BoE held Bank Rate at 3.75% at its 30 April meeting, as widely expected. Governor Bailey has acknowledged the "very big energy shock" generated by the conflict, while indicating the Bank will not rush its response given the complex crosscurrents at play. From markets having priced in two cuts by year-end before the conflict to now pricing in one hike – albeit in reality they are just pricing in uncertainty – the outlook for rates depends entirely on the outcome of the conflict.

We cannot predict the outcome of the conflict nor the extent or duration of the economic impact, though we can say it will weaken growth and drive-up inflation. Hopefully not too much nor for too long.

UK commercial real estate investment totalled £9.2b in Q1 2026, representing a 15% increase on an underlying basis, when stripping out last January’s £6.0bn Annington portfolio transaction.  There are no immediate signs of material market impacts as a result of the conflict in the Middle East, and the market enters this period of potential volatility on strong foundations.

Offices saw the greatest share of activity, with 30% of total investment, reaching £2.6b in volumes that matched Q1 2025 levels, demonstrating sustained appetite after recent improvements in confidence. The Living sector captured the second largest share at 21% with £1.9b invested, though this reflected a 32% decline from last year, even when excluding the Annington portfolio.

International capital remained a driving force in the UK market, accounting for 53% of total transaction volumes. Americas based investors led regional buyer groups with a 19% share of total investment, with the USA emerging as the single largest source of capital at £884m, dominated by Private Equity capital who continue to see opportunities in UK real estate markets.

UK occupiers face mounting cost pressures that are fundamentally reshaping their real estate strategies. Organisations are scrutinising every operational expense and ‘rightsizing’ their portfolios through data-driven decisions. Despite improved utilisation rates post-pandemic, spaces remain underutilised—in 2025, EMEA utilisation averaged just 58% against a target rate of 80%—creating urgent demand for more adaptive, flexible portfolio models rather than fixed footprints with long-term commitments.

The office attendance landscape is evolving, with 62% of UK employees now under structured policies, with three-day mandates the most common. However, successful organisations are focusing less on enforcement and more on creating compelling workplace experiences that make the commute worthwhile. Our research confirms that compliance rises when offices deliver comfort, autonomy, and wellbeing—people reject poor office experiences, not offices themselves.

The future of workspace extends beyond building walls to encompass the complete "street to seat" experience. Employees increasingly value connectivity, security, and access to flex space as core amenities. While 70% of UK workers cite nearby green spaces would improve their daily wellbeing, 62% want vibrant neighbourhoods with dining and social options. Organisations are targeting locations with strong surrounding amenities, building elastic portfolios that combine fixed space with flexible solutions, recognising that experience has become the critical driver of employee engagement, productivity, and loyalty.

London Office

Central London’s office market maintained robust momentum in Q1 2026, with leasing activity totalling 2.2 million sq ft. This marks the highest first-quarter take-up since 2022, standing 14% above Q1 2025 (1.9 million sq ft) and 6% ahead of the five-year Q1 average.

Regional Office

Good quality space remains scarce, resulting in continued prime rental growth. Big 6 rental growth was 3.6% in Q1 alone, which was led by strong uplifts in Bristol and Edinburgh, and most significantly Birmingham, where rents moved up by 13% quarter-on-quarter.

Industrial & logistics

JLL's Grade A logistics big box (100,000 sq ft +) showed an increase in take-up from e-commerce operators.  27% of take-up was attributed to this group in Q1, with a notable increase in demand from Chinese e-com operators who are looking to increase their exposure to the UK.

Retail

UK retail sales rose 0.7% in March, fully reversing February's decline and driving first-quarter growth of 1.6%, with annual sales values up 4.1% as consumers demonstrated continued resilience despite broader economic headwinds.

Living

In a significant shake-up to the private rented sector, the Renters' Rights Act comes into force on 1 May, replacing most new and existing leases with assured periodic tenancies and abolishing Section 21 no-fault evictions. Although BTR is well-positioned to adapt, increased regulatory burdens could see smaller landlords exit the market, putting further pressure on stock and rents over the coming years.

Life Sciences

The UK's new entrepreneurship tax relief package will unlock £100m in additional annual investment by quadrupling EMI scheme eligibility thresholds and doubling investment limits, supporting c.1,800 high-growth scale-ups in life sciences, fintech, and AI over the next five years.

Data Centres

While OpenAI has paused its £31bn Stargate UK project at North Tyneside citing energy cost concerns, nearby Stellium Datacentres has demonstrated a viable solution by achieving 95% hourly matched renewable electricity and cutting emissions by 75%, proving that AI infrastructure can align with grid stability, and offering a blueprint that positions the North East as a competitive AI Growth Zone capable of addressing the sector's energy challenges.

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