In our Big Shed Prospects report, which came out at the end of 2025, we highlighted that, all things being equal, we expected 2026 to play out in a similar fashion to 2025. While there are many reasons to be optimistic about the market, such as rising demand from the defence sector and Chinese e-commerce players, we highlighted that economic growth would ultimately drive occupier demand to surprise on the upside.

While the Q1 GDP numbers from the ONS surprised on the upside and made the UK the fastest-growing economy in the G7, the latest monthly data suggests that the economy shrank in April as the first economic impacts of the Iran war start to take effect.

Add into the mix the UK will have a new Prime Minister by the autumn, it is likely that business confidence will be impacted until the policy direction of the new government becomes clear. Current media reports also suggest that a new Chancellor will be appointed, meaning that all eyes will be on what is delivered in their first Budget, the date of which is yet to be announced. This suggests that a repeat of the will they/wont they speculation of Q4 2025 is likely to be repeated.

What is clear, however, is that life goes on and occupiers ultimately need to make decisions regarding their estates and supply chains regardless of the geopolitical noise in the wider world. Take the online retail world, for example, the latest data from OFCOM shows that 2025 saw the highest amount of parcels ever delivered in one year at 4.2 billion, exceeding even the highs of the Covid pandemic. With the news, too, that the UK government is bringing forward the implementation of new rules surrounding "de minimis" imports to 2028, it is likely we will see more international e-commerce operations need to take space in the UK to work around those regulatory changed.

The sector will also welcome the fact that the Defence Investment Plan has finally been published after months of speculation. While the increase in defence spending is not at the level many had hoped, including the former Defence Secretary, who tendered his resignation in protest, it does mean that companies now have much-needed clarity on the direction of travel and procurement processes. Over time, we expect this clarity to have significant knock-on effects for real estate as increased defence spending translates into demand for advanced manufacturing, secure logistics, office, R&D, storage and supply chain infrastructure.

BUILD COST AND PROGRAMME

As 2026 started, sentiment was improving across the construction sector, with an improved outlook for viability, which has been severely challenged over the last few years. However, the onset of war in the Middle East has added increased uncertainty and we are observing early evidence that materials suppliers are starting to pass on cost increases for certain fossil fuel-related inputs. Indeed, evidence gathered since the start of the Iran conflict suggests that build costs are expected to increase in the order of 5–8% as contractors do their best to absorb some of the cost increases and not pass the full amounts on.

Part of the reason contractors have been minded to absorb some of the impact of rising costs relates to the wider construction outlook in the logistics sector. While build-to-suit (BTS) levels have marginally increased this year, they remain low by historical standards, and the level of speculative development is now 63% lower than its peak in 2022.

The current market conditions are prompting more schemes to be paused, redesigned or value‑engineered at early stages. Contractor insolvency risk has also re-emerged as a concern, with thin margins and greater exposure to material price spikes increasing caution among developers. Regulatory pressures are compounding these dynamics. The January 2026 BREEAM update and the full launch of the UKNZCBS have raised specification requirements, adding cost even as best‑in‑class ratings remain sought after by prime occupiers and investors.

The widening gap between legacy stock and rising ESG standards is prompting a growing shift towards refurbishment and asset repositioning. Recent data from the Savills research team highlights the case for refurbishment even further. The team examined 673 leasehold deals signed since 2020 where EPC ratings were available, including a mix of new and second-hand stock. The findings were consistent across regions, indicating that, on average, buildings with an EPC of A+ or A achieved a premium compared to those rated C or lower. At an aggregate level, this was 55% nationally.

The case for landlords to invest in retrofitting programmes is compelling. The data shows that retrofitting offers a clear opportunity to add value to existing assets, meet changing market expectations, and help create a more sustainable future. In a market increasingly influenced by ESG compliance and tenant demand, failing to upgrade risks assets becoming obsolete.

To read more on our outlook for build costs and programme timescales, click here to read our latest Build: Perspective report.

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