Tax rises have darkened the mood, not the market. Expansionary activity is rising across UK cities, driven by resilient office-led sectors and a race to secure limited Grade A space.
Just 24 hours after the Budget, Goldman Sachs announced that it would double headcount in its Birmingham office in the coming years. It's tempting, given the timing, to connect the deal to the contents of the Chancellor's speech – after all, it wasn't nearly as bad as many corporates had feared.
Goldman Sachs didn't mention the Budget in its announcement, and we can't know the role it played, but we do know that a growing number of the UK's largest businesses have been looking beyond the annual fiscal government event for several months. In fact, the past two quarters have seen major expansions shape the regional office leasing market, according to our latest Big Ten report – a clear structural turn after five years of contraction or consolidation.
This may feel counterintuitive, given the OBR’s modest (and downgraded) outlook for GDP and productivity. However, the sectors likely to outperform in the medium term will be office-led. Professional services firms have been responsible for more than a quarter of take-up so far this year, led by law firms, for example.
The latest economic forecasts across the market are building on this narrative. The UK’s fastest growing sectors in terms of GVA over the next five years are predominantly office-based, including information & communication, admin & support activity and professional / scientific activities. The worst performers tend to be largely field based, such as manufacturing and mining.
A tangible shift in sentiment
Granted, expansionary activity in the office market isn't solely about growth - a worsening shortage of high-quality office space in our regional cities is prompting companies to engage earlier. Return-to-office patterns have settled above early expectations, and many of the firms that downsized during the pandemic are now under-served. See our recent 'Time for Change' report for more on that.
But that shouldn't deflect from the tangible shift in sentiment that has occurred in the past twelve months. Companies across a broad range of sectors are growing at pace. In Manchester, AutoTrader has increased its footprint by 80%, while DF Capital has more than doubled its space to 23,261 sq ft. Professional services firms are scaling too: Forvis Mazars expanded by 95% in Birmingham and BDO grew by 27% at 30 Semple Street in Edinburgh. TLT LLP is doubling the size of its Birmingham office. Flex operators are following suit, with 2 Work recently increasing its Leeds footprint by around 57%.
We're also seeing companies take space and then further expand within the same building. Birketts added a floor at their EQ office in Bristol, EY added an additional 24k sq ft to their original agreement at Three Chamberlain Sq in Birmingham and Ramboll increased its footprint by 52% in The Distillery in Bristol.
Green shoots emerge as rents surge and supply crunch deepens
Availability of quality space is continuing to drop, after years of gradual tightening – Grade A vacancy averaged 2.4% across the Big Ten cities in Q3, down a further 29 bps in the last six months. The key question now is whether developers stung by rising financing and build costs will be coaxed into responding.
There are unquestionably green shoots. Prime rents are rising toward the c.£55 per square foot threshold that many developers need to unlock viability. Build cost inflation is easing, though at around 3% a year for the next five years it will likely remain above the headline rate of inflation. Yields have stabilised across the Big Ten at 6.75%-7.50% and are expected to begin contracting in 2026.
These pressures are stirring some development activity; Landsec broke ground on its c.243,000 sq ft The Republic, Mayfield scheme in Manchester in Q3, as did Prescient Capital on its c.80,000 sq ft Wellington Plaza redevelopment in Leeds. In Edinburgh, Bell Hammer and Aviva also started clearing works on the 154,000 sq ft Rosebery House project in Q3. However, many future developments remain hinged on the security of a pre-let, at a significant rental premium.
Expansion is no longer anecdotal in the regional office market. Two quarters of strong expansionary activity, supported by growth amongst the key office-led sectors, suggest demand should stay resilient even against a tougher fiscal backdrop. But occupiers are expanding into a market where Grade A choice is shrinking and prime rents are rising, so competition for the best space will continue to intensify.
The Q3 groundbreakings coupled with significant prime rental increases are the first credible signs that development viability could soon edge back. Now the Budget has passed, we’ll get more clarity on yields, inflation and financing conditions, which together will decide whether 2026 brings a second wave of starts – or whether the supply gap widens just as occupier growth gathers pace.
