Economic Market Update

The UK – and indeed global – economic outlook is heavily dependent on the unfolding events in the Middle East. Whilst this is foremost a human tragedy, the economic ramifications are manifold. The most obvious channel is energy - we are in the midst of an energy supply shock  where c.20% of the world’s oil and gas supply is temporarily blockaded within the Strait of  Hormuz. If the Strait reopens in short order, the impact will be limited and economies will  recover within a quarter or two. An inflationary impact may linger a little longer, but it won’t  become entrenched. If the Strait remains closed for an extended period, the impact will be  stagflation, or a recession coupled with inflation.

It is not just energy that is affected: petrochemicals and their derivatives, including fertiliser inputs (ammonia, nitrogen, urea), plastics, metals, chemicals and pharmaceuticals are all seeing supply chain disruption, which will intensify the longer the crisis continues or the deeper the damage to infrastructure from attacks. Global shipping has seen capacity decline and costs climb. While the UK is not overly reliant on direct imports from the Middle East, it is affected by global price changes resulting from the conflict and increased competition for scarce commodities. Global (and UK) benchmark borrowing costs have surged since the conflict began, as investors price in higher inflation: UK 10-year government bonds have seen yields rise from c.4.30% at the end of February to 4.97% as of 26th March.

Expectations for monetary policy have also changed substantially. From pricing in one to two more 25bp cuts from the Bank of England, markets are now pricing in three hikes. A note of caution here: first, the situation is highly dynamic and could reverse suddenly; secondly, were the UK to face recession, it is likely the BoE would not further supress domestic activity by raising interest rates but may cut instead to prop up growth (even at the risk of losing some inflation-targeting credibility).

Going into this crisis, the UK economy was in fair shape: growth was set for c.1.0% this year; inflation was coming down; the labour market, whilst soȅening, was still pretty robust with employment notably high; and the policy rate was close to neutral. Banks were well capitalised and consumer and business confidence was healthy-enough. A short crisis can be absorbed and recovered from. A longer crisis would require a response: monetary policy has room for manoeuvre and whilst fiscal headroom is minimal, additional spending could be managed if necessary.

It is too early to say how the war in the Middle East will evolve and what the economic impact will be. We remain hopeful for a swift resolution.

Our latest review and outlook explores the conditions driving growth in the commercial real estate market, with underlying transaction volumes forecast to increase by 10-15% this year and steady growth projected through 2030. Market confidence was incredibly strong at the start of the year, with 99% of poll respondents expecting UK real estate conditions will either stay the same or improve over the next 6 months.

Recent polling reveals clear sector preferences among investors. Data centres and energy infrastructure lead the pack with 74% of respondents viewing them as most resilient, while industrial and logistics sectors captured 67% of votes. Office real estate is staging a notable confidence comeback, attracting 62% of resilience votes when combining London and regional markets, with London offices alone ranking as the single most resilient individual sector.

The wide divergence in confidence levels across sectors creates both clear winners and potential opportunities in overlooked segments as market fundamentals continue to improve throughout the year. Read the full 2026 UK commercial real estate outlook report for detailed insights.

London Office

February was a strong month for take-up, with volumes standing at 0.8 million sq ft, the strongest February volumes since 2022. This has brought year to date volumes to 1.2 million sq ft, up on the 0.9 million sq ft recorded in 2025 and in line with the long-term average.

Regional Office

The Big 6 markets continue to see a downward trend in the new build vacancy rate (1.8% as at Q4 2025) and this reinforces messaging that there are opportunities to reposition existing stock to address the supply gaps faced by these markets. 

Industrial & logistics

The latest BPF report highlighted how historic undersupply of industrial space across the UK has artificially suppressed demand and cost the UK more than 140,000 jobs since 2010. This underscores the sector's critical role as employment infrastructure, revealing that while occupier demand has remained strong over the past decade, constrained supply prevented the market from reaching its full potential and supporting greater job creation across the UK economy.

Retail

While the broader UK retail leasing market faces challenges, top-tier shopping centres and major destinations are bucking the trend with vacancy rates significantly below market averages, highlighting a growing divide between premium and secondary retail assets.

Living

Having been a major roadblock for new high-rise housing, the Gateway 2 building safety process has improved markedly over the last few months, with the latest government data showing approvals taking 18 weeks - down from 36 last year. While not yet at the 12-week target, it does demonstrate tangible progress

Life Sciences

Britain races to secure its position as a global life sciences powerhouse, with government and industry launching an accelerated taskforce targeting third place in the world rankings by 2035. Fast-track reforms to medicines pricing and innovation incentives could see pilot schemes launched by September 2026, years ahead of traditional negotiation timelines.

Data Centres

AI set to dominate data centre demand, with AI workloads projected to represent half of all capacity by 2030. As inference overtakes training by late 2026, expect accelerated growth beyond traditional tech hubs into new regional markets.

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