With geopolitics remaining unpredictable, significant downsides remain present in the outlook
The macro picture
As noted in the bull section, the Trump administration's tariffs have had a chilling effect on the UK economy this year. Overall economic growth has slowed post-tariffs. There are, of course, significant downside risks to global trade. The renegotiation of USMCA is the next major event on the horizon in mid-2026, with the Trump administration signalling they’re prepared to play hardball to push for further concessions. Beyond this, tensions between Venezuela and the US have the potential to escalate sharply and could lead to an unexpected spike in oil prices, which are currently on a downward trend.
Both of these events could exacerbate rising inflation in the US, potentially forcing the Federal Reserve to reverse course on interest rates. This would push up global bond yields, raising the cost of debt for the UK government.
Uncertainty and concerns of a potential bubble in US equity markets, driven by a bull run in AI, also have the potential to cause instability. While much of this investment is centred on the US, a market crash would have significant spillover effects, reducing household wealth and damaging business confidence. Indeed, at present, there are no clear signs of the productivity gains touted by these businesses, and the investor pile-in appears to be draining capex spending from other sectors.
The IMF reduced the UK’s 2025 GDP forecast from 1.6% to 1.1% in April, before revising its estimate for year-end to 1.3% in October. Lower growth will further exacerbate the confidence issues that plague the UK economy, and a deterioration in global trade or bond market turmoil would make matters worse.
Tariffs notwithstanding, the UK’s economy has been in stormy waters more or less since the end of the pandemic, although arguably, the drift has been ongoing since Brexit. The second half of 2025 has seen the government and financial markets gripped by a crisis over the long-term fiscal position of the UK.
Weaker GDP growth potentially reflects one of the key weaknesses of the UK economy: productivity, the long-term driver of economic growth, wages, and fiscal health, has been persistently weak since 2008. ONS flash estimates show that output per hour has only increased by 3.1% since 2019, and the OBR downgraded its productivity forecasts to 30 bps as part of its Budget release. If the government fails to kick-start productivity growth, then a decline in living standards and fiscal instability is inevitable. In the long run, the result would be weaker consumption and, in turn, lead to a decline in demand for logistics space.
Indeed, there is an argument to be made that OBR forecast revisions to productivity growth are optimistic relative to recent performance. And the UK government may quickly find itself in the same position it faced pre-2025 Budget, with its fiscal headroom evaporating, making a tough choice between further damaging its standing with the electorate by breaking manifesto promises or losing credibility with global bond markets.
The Autumn Budget created several economic risks to the sector. As we note in the bull case, the OBR has downgraded productivity, which, in addition to weaker GDP growth, will lead to weaker consumer spending and reduced business investment. While the Budget has left some fiscal headroom, gilt yields remain sensitive to the government’s fiscal credibility. If productivity growth slows further, this would quickly call into question much of the government's planned investments and social spending. This could quickly see gilt yields rising again, negatively impacting property yields. Additionally, widening budget deficits would necessitate tax hikes, driving down disposable incomes and consumption.
The other side of slow economic growth in the last three years has been persistent sticky inflation, even as the European Central Bank (ECB) has brought rates in line with its target rate, UK inflation has been substantially harder to rein in. Households’ expectations of further inflation are likely to drive harder bargaining for wage increases, leading in turn to rising production costs, perpetuating a wage-price inflation cycle. Beyond this, geopolitical events, such as tariffs and energy and commodity price inflation, over which the UK has only limited influence, have the capacity to create another wave of inflation. All of these factors have slowed the BoE’s capacity to reduce interest rates and give a much-needed shot in the arm to the overall economy. Indeed, a 4.1% hike in the minimum wage in April will drive up wages and may drive further wage-price inflation as businesses pass on costs to their customers.
When writing a report with predictions for 2026, it’s probably cheating to say “expect the unexpected”, but one clear pattern that has emerged in the last decade has been consistent economic and geopolitical shocks to the world’s economy. With alarm bells ringing in the US equity markets, regional conflicts across the world intensifying, and major global superpowers increasingly at odds with each other, it’s not unlikely that we see the occupier and investment markets take yet another hit from unexpected circumstances.
The market picture
As we noted during the bull case, the I&L market showed some clear signs of improvement in Q3 2025. Take-up is up significantly this year, and is easily on track for the strongest year since the end of the pandemic. With that said, a not insubstantial portion of this take-up has come from a number of larger mega-deals, which account for 15% of take-up in the first three quarters of the year. Given these reflect strategic decisions that were potentially necessary to take regardless of the current economic climate, questions remain as to whether this trend will continue into Q4 2025 and beyond.
Crucially, as we lay out in the economic case, we don’t see any significant overall improvements in the economy that would form a catalyst for a sustainable recovery in the occupier market. A number of factors are due to weigh on consumer spending, reducing demand for I&L space from retailers and 3PLs. Similarly, global trade is due for a muted year, given the continued uncertainty injected into the market by the Trump administration’s tariff policy. As such, there are few reasons to believe that occupiers will come to the market in greater volumes next year than they have this year.
Looking to 2026, landlords and developers looking for a return to the strong rental growth the market is used to, and which underpinned many purchases at the end of the pandemic, will be disappointed. Assuming net absorption remains positive, there remains a large volume of new and second-hand space that will need to be absorbed before supply tightens sufficiently to trigger above trend rental growth.
Indeed, if we look at the Savills requirements index over the last three quarters, the index has been in the doldrums, with an average reading of 66.1 points over the last four quarters compared to an average of 88.8 points over the last five years. Tariffs may have a delayed effect here. We expect the particularly weak result seen in Q2 2025 to translate to low levels of take-up in Q1 2026. Even as requirements have improved in Q3 2025, they still remain well below healthy levels.
Looking ahead, while our baseline forecasts suggest a decline in the vacancy rate in 2026, this outcome is highly sensitive to changes in take-up and supply. If take-up falls again and the speculative pipeline expands again, we could quickly see supply rise in our downside scenario. While we don’t expect vacancy rates to rise to the point of triggering negative rental growth, this would likely leave the market with excess supply for the foreseeable future.
Another factor of note is that whilst deals are happening, we are certainly seeing softening around the terms being offered. Whilst headline rents have generally held up well, we are seeing incentive packages increase and lease terms shortened as occupiers try to gain more flexibility. Indeed, one of the most pronounced datapoints in our occupier data this year has been the shortening of the average lease from 13.5 years in 2022 to 12 years in 2025, a decline of 11%.
Indeed, there are already indications that developers will develop more in 2026. Our Savills European Logistics Census shows that 36% of developers plan to speculatively develop more stock in 2026 and another 32% will develop the same amount. While this is a pan-European census, it’s worth noting that many of the developers who responded are active in the UK.
Wider issues
Looking at the market more broadly, business rates are likely to have a significant impact on occupiers in 2026, with rateable values rising by 28% to 30%. Occupiers with large distribution hubs will face the greatest pain, even though a reduction in the annual multiplier shields the pain somewhat. Since 2024, occupiers with annual revenues over £500 million — who usually take larger units — have made up 57% of total UK market take-up. These occupiers will be disproportionately impacted by these rate hikes, denting the big-box market’s recovery. This will push up the costs of doing business, disincentivise taking additional space for future needs and the potential for occupiers to evaluate their options when considering new space.
Combined with further cost rises for employers, such as the rise in the minimum wage, there is a growing school of thought that occupiers consider further investments in robotics and automation. In general terms, such units are taller and require more power, both limiting factors when searching for sites to accommodate BTS units.
Further compounding difficulties around costs, energy standing charges are expected to rise sharply in April 2026, increasing operational overheads for warehouse occupiers, particularly those with high power demand for automation and temperature control. With Ofgem reforms pushing business charges sharply higher from April 2026, occupiers face mounting pressure to renegotiate energy contracts, invest in efficiency, and consider on-site generation. These trends will influence affordability and long-term location strategies across the sector.
The proposed levy on electric vehicles could materially impact occupiers’ growth strategies. Many logistics operators electrified fleets to cut fuel costs and align with sustainability goals, assuming long-term savings would support reinvestment into new facilities and network expansion. A levy would reverse these assumptions, inflating operating costs and squeezing margins. This would be yet another knock to business confidence and could see occupiers planning additional hubs or larger footprints, delaying or downsizing projects. This policy risks slowing supply chain modernisation and dampening the sector’s ability to scale efficiently.