THE CONSTRUCTION MARKET
Demand stalls but new orders grow
Total construction output fell 0.3% in the three months to October 2025, led by a fall of 1.0% in repair and maintenance work, while new work grew by 0.1%. On an annual basis, all work grew by 1.5% in Q3 2025 compared to Q3 2024.
At a sector level, within new work, public sector activity grew the most, showing 22.5% growth in the year to Q3 2025, followed by private industrial work with 20.7% growth. The weakest sectors were public housing (-16.3%), affected by revised targets, and private commercial work, which fell by 8.0%.
Softer market conditions have reduced tender activity in the private sector, prompting continued moves by contractors to pivot toward public sector projects with secured funding. Contractors remain risk-averse, favouring simpler projects over complex, large-scale opportunities.
New orders, a forward-looking indicator of future demand, increased by 9.8% in the third quarter and by 29.3% in the year since Q3 2024, the largest increase since Q4 2021.
Private industrial and commercial segments are leading the charge. In Q3 2025, private industrial new orders more than doubled compared to Q2, while private commercial jumped 51.4%. These gains reflect renewed confidence in logistics, manufacturing, and office development, likely driven by easing inflationary pressures and stabilising interest rates.
Slow pipeline progression
December’s S&P Construction Purchasing Managers’ Index (PMI), which tracks sentiment in the sector, remains firmly below the 50.0 marker which suggests falling workload, where it has been for the past twelve months. Civil engineering was the weakest performing sector, while two subsectors (residential and commercial) recorded the sharpest drop in activity since May 2020, accompanied by significant declines in new orders and employment.
The survey's respondents attributed the current outlook to weak market confidence and slow progression on the pipeline. However, looking ahead, firms expecting increased activity over the next 12 months slightly outnumbered those predicting a decline. The UK's long-term economic prospects, falling inflation and lower borrowing costs were seen as key drivers of the future workload.
Source: S&P Global
Looking ahead
Although uncertainty has weighed heavily on real estate development confidence, occupier demand has remained strong. This imbalance between supply and demand has supported higher rental values, and data suggests that it could encourage a renewed pipeline of projects.
CBRE’s (2025 UK Real Estate Market Outlook) reports that all-property capital values rose by 1.4% in H1 2025, largely driven by a 1.6% increase in rental values over the same period.
New orders in construction, a key indicator of future demand, rose 9.8% in Q3 and 29.3% year-on-year since Q3 2023, marking the largest increase since Q4 2021. This points to a robust pipeline waiting to be converted into output.
Private industrial and commercial segments are leading this surge. In Q3 2025, private industrial new orders more than doubled compared to Q2, while private commercial orders jumped 51.4%. These gains likely reflect renewed confidence, driven by easing inflationary pressures and stabilising interest rates.
Forecasts echo this optimism, with the BCIS expecting new work output to increase by 4.4% in 2026, while the average of other commentators suggests 2.8%, rising to 3.4% in 2027.
The UK real estate investment outlook
In logistics and industrial work, the strong growth in artificial intelligence (AI) and continued investor interest continue to fuel the demand for data centres. Outdoor storage facilities, cross-dock warehouses and urban logistics assets are also seeing strong growth.
The office market has benefitted from a growing trend of businesses encouraging staff to return to the workplace more often, alongside growing occupier demand for more sustainable, high-quality space to meet their Environmental and Social Governance (ESG) targets. There is also a clear preference for high-quality environments that attract and retain staff in a competitive recruitment environment.
Investment in defence, the New Hospitals Programme and the Ministry of Justice is gathering pace and is expected to support construction activity. This momentum should be further reinforced by the Planning and Infrastructure Act, which received Royal Assent in December 2025, and aims to streamline the delivery of new homes and critical infrastructure across England.
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