There are signs of optimism within the UK construction market; certain sectors show promise, while others are impacted by low confidence. Construction output grew by 0.3 percent in the three months to August 2025, led by a 1.3 percent increase in repair and maintenance work whilst new work fell by 0.4 percent.
Within new work, infrastructure, private industrial and public work have continued to be the main drivers of growth. The commercial sector, which includes offices, leisure, health, and shops, has notably hindered commercial output since 2020, currently being more than a third smaller than it was at the onset of the pandemic. (Figure 2) illustrates that annual growth has been fuelled by private industrial and public work.
The speed at which sectors can rebound to higher growth levels will depend on how the UK’s finances shape the tax and interest landscape, influencing corporate spending capacity, as well as the robustness of the public purse to support investment.
In its October update, The Construction Products Association (CPA) downgraded its outlook for construction (Figure 3), crucially lowering its forecast for commercial activity from -0.2 percent to -1.9 percent.
The CPA explains that that “lingering uncertainty and weak business confidence are continuing to delay the start of large new build commercial projects that we in the early pipeline” and refurbishment or repurposing of existing commercial buildings is supporting activity instead. Its October report echoed its own sentiment from the summer; “the only clear certainty remains uncertainty.”
SENTIMENT
The shape of UK construction has changed
In the decade leading up to the pandemic, commercial work accounted for an average of 30.0 percent of all new construction work in the UK, peaking in Q4 2007 at 42.6 percent, but has since fallen to closer to 20.0 percent (Figure 4).
Infrastructure has enjoyed a contrasting outcome, more than doubling in size over the same period. Now, it accounts for a quarter of all new construction output, driven by strong demand, necessary upgrades, and government support.
Public sector spending remained relatively stable between 2019 and 2024, but lower spending in other sectors has increased the importance of public spending. However, in 2025, there has been genuine growth in public sector spending; output in the year to date is 18.0 percent higher than the same period in 2024, driven by projects in schools and health.
Considering the magnitude of the shift towards other sectors, it is not surprising that contractors have evolved and moved into these spaces too, especially given the focus on them through government support such as the Infrastructure Strategy and the Industrial Plan, among others.
SCENE
The picture in London
(Figure 5) illustrates the shifts in the composition of new work output in London. Previously, private commercial work held the dominant position, but in the last five years, that spot has been challenged by private new housing and, more recently, by infrastructure work. As a result, while the commercial market may be oscillating between confidence and apprehension, the key inputs - people and materials – have experienced continued pressure from other sectors.
The annualised value of new work output in London has increased by 4.0 percent compared to the previous four quarters. The private industrial sector has experienced the highest growth rate, whilst infrastructure has seen a slight decline, despite initial optimism at the beginning of the year.
Although the commercial sector has not matched the growth rate of other sectors, there are encouraging signs. The office vacancy rate in Central London has decreased slightly from 8.1 percent at the end of Q1 to 7.8 percent in Q2, and the high availability of space remains bolstered by significant amounts of second-hand space, rather than newly delivered space. With a limited development pipeline, the vacancy rate may continue to decline as take-up has been rising, particularly for large transactions.
The residential market continues to face viability challenges stemming from regulations such as dual-aspect, future homes, and enhanced fire safety legislation, as well as delays linked to the extended Gateway Two sign-off process. These delays create longer programmes, which incur additional inflation and often necessitate extended pre-construction periods.
Consequently, data from Molior shows that in 2015-2020, there were 60,000 to 65,000 homes under construction at any time; today, that stands at 40,000 and is expected to fall further to 20,000 at the beginning of 2027.
DEMAND
Mixed messages against a backdrop of demand
The recent history of uncertainty has caused constraints in the development pipeline. Deloitte’s Summer 2025 London Office Crane Survey indicated a notable decline in new office construction. Projects that failed to start, or were delayed, have created a gap in supply. According to CBRE’s European Office Occupier Sentiment Survey 2025 (which includes the UK), 52.0 percent of occupiers planning to move in the next three years expressed concerns about supply constraints, especially for high-quality space in prime locations.
Sentiment surveys from the industry convey mixed messages. The Construction Purchasing Managers’ Index from S&P Global has been increasingly negativity since the Budget at the end of 2024 (Figure 6). However, there has been a slight improvement in the outlook, as the government has introduced successive plans. Conversely, RIBA’s Future Trends survey reported a strong rally in London’s workload, with more than two-thirds of respondents anticipating workloads will either increase or stay the same. According to the Institute of Chartered Accountants in England and Wales (ICAEW) Business Confidence Monitor for August 2025, companies maintained a positive outlook, with the sector performing above the national average. The RICS UK Construction Monitor suggested that the “net balance remains in neutral territory” and that, despite a marginal decline, it remains broadly stable.
This mixed sentiment stems from varied attitudes to risk in different segments of the market. Large-scale developments, which involve long pre-construction periods and programmes, have borne the brunt of recent uncertainty and low risk appetite from both contractors and funders. In contrast, smaller projects and refurbishment works have progressed steadily, fuelled by the necessity to develop existing assets and achieve sustainability targets.
Smaller and more agile strategic refurbishments have become more common in place of full redevelopment to avoid obsolescence and sustain rental streams. They also offer asset owners a faster route to market, which some have tried to position for a time of low supply.
There remains strong demand for office space, and that demand appears to be on the rise. In Q2 2025, UK office take-up reached a three-year high, with 20.3m square feet leased in the rolling 12-month period, according to CBRE data. This was up 3.0 percent year-on-year and 2.0 percent above the ten-year average. Central London was the leader in activity, with 11.8m square feet of space leased, and tenants are generally opting for larger footprints, especially supported by return-to-work policies in some industries.
Contractor appetite and attitudes
The recent period of low confidence has impacted workloads. Data from Glenigan shows that main contract awards in the UK over £100m have fallen by 13.0 percent in the year, and new starts by 63.0 percent. London has captured the majority of new office starts with an 87.0 percent annual increase, but planning approvals are 64.0 percent lower, and retail approvals in the area have seen the greatest fall, plummeting 90.0 percent. This low confidence in the future pipeline, twinned with growth in other areas of the wider construction sector, has further encouraged contractors to diversify their workload.
Market appetite is evident; however, it is being driven by views on risk and contract terms, with a sharp focus on securing future turnover. Within the wider subcontractor level, there is generally sufficient work for companies to be selective about which projects they work on, which clients they engage with, and the terms they are prepared to accept.
This risk aversion has been driven in part by high levels of insolvency and administration in the construction sector. Insolvencies have increased by more than 22.0 percent since pre-COVID-19 according to the Insolvency Service, although they have trended downwards in recent months as material price volatility has calmed down.
The bottleneck previously seen in the tier one, main contractor market for large projects in London means that the return of Bovis to tender lists is welcome news. Concerns about low capacity across the rest of the supply chain have prompted others to "step up" and compete for larger projects.
Contractor availability and willingness to take on risk are two crucial elements influencing pricing in the market. Although appetite remains evident among certain early trades, capacity in the MEP market remains tight due to high demand, recent consolidation, and regulatory oversight. There is a balancing act between sectors; those that depend on residential or heavy demolition work may be less pressured than those working in refurbishment, fit-out or data centres. It is, therefore, essential to bear in mind that any forecasts for tender price inflation will reflect an average of these varied sectors.
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