How government policy, AI, economic conditions and supply constraints are influencing occupier decision-making

As devolution gathers pace across the UK, its full impact has yet to be felt. However, it is set to create a more regionally differentiated market, making it increasingly important for occupiers to understand how local priorities, investment and decision-making could reshape future opportunities. This political shift comes alongside persistent cost pressures, constrained supply of best-in-class office space, and rapid technological change driven by AI.

Against this backdrop, a tension is emerging in real estate decision-making. Corporate real estate teams and decision-makers must align portfolios to rapidly changing business priorities, often without a meaningful budget increase.

Where is UK corporate sentiment right now?

The latest UK corporate sentiment surveys, suggest that confidence was beginning to recover, but from a low base and at an uneven pace.

The August Lloyds Business Barometer, which surveys 1,200 UK companies, found business confidence had reached a five-month high, while economic optimism increased for a second consecutive month. This suggests that businesses remain confident in their growth prospects and are becoming more accustomed to navigating economic and political uncertainty.

However, the latest ONS labour market data highlights the continued pressure on businesses. Vacancies have fallen to their lowest level since 2021, reflecting a softer hiring environment as employers contend with rising costs. The British Chambers of Commerce calculated that costs for the average SME have increased by more than 70% in the last ten years due to successive governments’ policies.

For occupiers, this reinforces the need to invest in workplaces that support business growth while maintaining tight control over costs.

How is government policy changing the occupier landscape?

The biggest structural change is devolution.

The English Devolution and Community Empowerment Act represents the most significant reform of local government in a decade and is giving mayoral authorities greater influence over growth, planning, infrastructure and skills. For occupiers, the key factors to think about are:

• The impact on location decisions. At present, only 5% of UK tax revenue is collected locally, while 95% flows to central government. The expected fiscal devolution roadmap could give mayors greater control over locally generated revenues, enabling longer-term planning for transport, housing, skills and regeneration. That gives businesses clearer evidence of a region’s sector strategy and the backing to deliver it – deepening clusters and de-risking the decision to commit.
• Planning is becoming increasingly mayoral-led. New powers over strategic development, infrastructure funding and planning approvals should help accelerate development and improve coordination between transport, infrastructure and growth objectives. As a result, locations that may previously have been constrained by connectivity or delivery challenges could become more attractive.
• As the market now moves from theory to practice, occupiers must consider not only the intended benefits of the new framework, but also how landlord behaviour, lease structures and pricing dynamics are likely to adjust in response.  

Beyond the Act, the new government has set out a wider growth push. What should occupiers watch?

The Chancellor’s growth speech in early September included three strands with a real estate dimension. First, the axe: judicial review reform is being extended from energy projects to all nationally significant infrastructure projects so that repeated challenge rounds can’t block delivery – if that holds, timelines shorten for the grid connections, transport schemes, data centres and lab-enabling infrastructure that currently gate innovation-led development.

Second, testbeds: new sandboxing powers, ready to deploy across the economy next year, will let businesses safely trial frontier technologies – from pavement robots to drones to medical treatments. Sandboxing has a physical footprint: regulators need real streets, skies, hospitals and campuses to test in, and the city-regions that host them will attract the companies developing and commercialising these technologies.

Third, scale-up capital: the Northern 500 brings together 500 of the North’s most ambitious mid-sized businesses under the Great North partnership of mayors, while a proposed £150m British Business Bank scale-up fund will make £5m–£15m investments in high-growth firms and university spinouts. By providing businesses with the capital to scale, hire and expand, these initiatives could translate into increased demand for office and innovation space, supporting occupier growth across the region.

Talent is a core driver of location decisions. How does devolution change the equation?

Talent has always shaped location strategy, but the way occupiers assess it could change. Devolved adult skills budgets and new Technical Excellence Colleges will give strategic authorities greater scope to align training with local sector priorities. This means future skills pipelines may look materially different from today’s labour market.

Occupiers therefore need to look beyond current workforce availability. The location equation should consider where skills investment is going, which sectors local leaders are backing and whether transport, housing and education plans will support recruitment over the full life of a property commitment.

That makes engagement with mayoral authorities, local councils, universities and training providers increasingly important. Businesses should understand local growth plans, available incentives and wider devolution benefits early in the process, while also considering how they can help shape the talent pipeline. As investment, infrastructure and skills programmes take effect, locations previously overlooked may become credible alternatives for expansion or consolidation.

How does this translate into real estate decisions?

Real estate decisions are becoming more complex, and capital is being stretched across competing priorities. As more investment is directed towards technology, for example, less may be available for workplace fit-out or major portfolio change. The answer is not simply to spend less on real estate, but to make it work harder.

Although there is nuance at a sector - and even company - level, for most organisations, AI adoption is moving much faster than organisational integration. Many businesses are deploying AI tools, but relatively few have redesigned workflows, governance structures and operating models around them. As a result, the immediate impact on real estate is less about reducing floor space requirements and more about the use of space, ensuring workplaces can support new ways of working, collaboration, learning and innovation: dedicated AI innovation labs or centres, reconfigurable workplaces and a greater focus on quality.

Connectivity, resilience and operational performance are becoming increasingly important selection criteria, with greater optionality being built into leases through flexibility provisions and break structures, reflecting the uncertainty around how AI will ultimately influence organisations’ space requirements.

This may result in sharper prioritisation: concentrating investment in higher-performing workplaces; adapting existing space where it can meet future needs; using flexible or fitted options to reduce upfront capital; and sequencing change so that savings from portfolio optimisation can help fund transformation.

Local market conditions, however, constrain occupier choice. High construction and borrowing costs continue to limit development, meaning headline availability overstates the supply of sustainable, well-connected and adaptable space. New and Grade A availability across the UK’s major regional cities fell to 3.6 million sq ft in Q2, down 4% year on year and its lowest level since the end of 2024. Grade A vacancy consequently declined to 3.0% of total stock. With only 2.3 million sq ft of speculative space under construction and due to complete before 2029, competition for the best space is likely to remain strong.

The practical response is to start earlier and preserve optionality. Occupiers should connect business transformation, workforce planning, capital allocation and property strategy before a lease event forces action. Early engagement with local authorities and the market can reveal incentives, emerging locations and supply risks, while creating more time to compare refurbishment, relocation and flexible-space solutions.

The strongest strategies will balance immediate efficiency with long-term capability. They will direct scarce capital towards the places and interventions that best support productivity, talent and transformation, rather than treating real estate as a standalone cost line.

For most occupiers, the biggest short-term impact of AI is not how much space they need, but how that space is used. As organisations move along their journey from AI adoption to integration, demand is likely to evolve towards more flexible, connected and higher-quality workplaces that support collaboration, learning and change.

In a market shaped by deeper devolution, evolving talent pipelines, constrained capital, technological transformation and limited best-in-class supply, waiting is rarely the lowest-risk option. The priority is to build a location and portfolio strategy that is cost-effective today, adaptable tomorrow and aligned with where local economies, workforces and technologies are heading.

To speak to our team about occupier strategy, get in touch.