Regions on the rise

Office occupiers in the UK's ten largest regional cities leased 1.4 million square feet of space during the second quarter, according to a new edition of Knight Frank's UK Cities report. That brings first-half take-up to 2.57m sq ft, the best performance for the period since 2019.

Lease events continue to drive activity, but we're now seeing a gradual return of larger, more strategic requirements, Darren Mansfield writes. Businesses are on the hunt for nearly 4 million sq ft of space, led by financial and professional services firms. The flight to quality is still the defining theme; Grade A space accounted for 64% of take-up during the quarter. The overall vacancy rate stands at 11%, but that falls to just 3% for Grade A space.

Development activity is lagging demand. At the end of June, just 2.3 million sq ft of speculative space due for completion by 2029 was under construction. The average regional prime rent climbed 7% year-on-year to hit £42.50, and some cities are seeing much more substantial growth, including Leeds (+31%), Birmingham (+16%) and Cardiff (+12%).

Larger deals

Improving sentiment is now translating into transaction activity. Investors spent £282m on regional offices during the second quarter, an increase of more than a third compared to the same period a year earlier. The half-year total of £816m is the highest total in four years.

Larger deals are returning too. Three deals exceeding £50 million completed in the first half, including Bank of New York Mellon's acquisition of Manchester's 4 Angel Square for £114m, Melford Capital's purchase of Waverley Gate in Edinburgh for £77m, and, most recently, Lloyds' acquisition of 10 Canon Way in Bristol for £66m. Around £310m of assets were under offer at the end of June, and a further £1.1 billion is on the market.

Regional office assets continue to offer an attractive income premium relative to risk-free benchmarks and many competing real estate sectors. Prime yields have been broadly stable this year, ranging from around 6.50% in Edinburgh to 10.00% in Aberdeen. That compares to about 5.25% in the City of London and 3.75% in the West End.

Consumer confidence

Rising activity in regional markets coincides with a surprise upswing in economic activity. UK private sector output expanded at the fastest pace since April during August, according to an S&P Global flash PMI. The services sector – the engine of Britain's economy – expanded at the fastest rate since February.

"The expansion is being helped by sunny weather and tech investment, though as expected we have seen some softening of growth in the manufacturing sector as precautionary stock building cools," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. "This reflects easing concerns, for now, over the economic impact of the war in the Middle East. Businesses are feeling more upbeat than at any time since the war began."

The rate of expansion suggests GDP growth could hit 0.3% in the third quarter.  Separate data from Gfk shows consumer confidence is now running at a two-year high. The firm's gauge of confidence for making major purchases rose to its highest level since December 2021.

Productivity puzzles

Andy Burnham has inherited one of Keir Starmer's most pressing problems: how to put the public finances on a more sustainable footing without raising income tax, VAT or employee National Insurance. The strategy so far has been to raise various taxes in an ad hoc fashion to adhere to fiscal rules – a strategy that becomes more unsustainable the longer it runs.

A solution to the UK’s so-called productivity puzzle has long been seen as one way to alleviate the government’s fiscal problems. Before the Global Financial Crisis, UK output per hour was rising by roughly 2% a year. Then, for reasons that remain disputed, growth fell to about 0.4% a year between 2009 and 2016, according to Bank of England estimates, and has largely stagnated ever since.

Economists have long suspected that ONS figures underestimate UK productivity, and sure enough new estimates from the Resolution Foundation think tank suggest that an upswing is now well underway. The group thinks output per hour had risen to an average of 1.1% over the two years to the end of June 2026, up from an annual decline of ⁠0.7% in the two previous years and an average rise of 0.7% in the late 2010s. Morgan Stanley puts it even higher: chief UK economist Bruna Skarica puts private-sector productivity growth at 1.8% ⁠a year – close to the pace seen before the global financial crisis.

If sustained, this could be huge. Previous research by the Office for Budget Responsibility stated that every 0.1% increase in productivity growth would cut the debt-to-GDP ratio by a whopping 25 percentage points. A full 1 percentage point increase, equivalent to a return to pre-financial crisis rates of productivity growth, could keep debt below 100% of GDP throughout the next 50 years.

The key question is why. AI has long been hailed as a potential solution to the productivity puzzle, but the data doesn't suggest it's having a massive impact – at least not yet. Some 12 of 19 sectors studied by the Resolution Foundation saw improved productivity growth in the past two years, including info and communications, retail, science, transport and health. "The UK’s productivity recovery has been achieved by the same workers, doing the same jobs, and working in the same sectors," says the group's principal economist Simon Pittaway.

In other news...

Britons swap nimby for yimby as support for housebuilding grows (Times).