Construction work set for 2026 recovery after 2025 industry slump

Construction work is set to bounce back over the next two years as the industry recovers from a difficult 2025.

Rising housing starts and an increase in office and industrial construction are expected to be the key drivers behind an 8% rise in the underlying value (worth up to £100m) of construction project starts, according to the latest industry forecasts from Glenigan.

Private and social housing will grow at an even faster rate in 2027. In addition, funding commitments in the Spending Review and expected tax rises are anticipated to fuel further capital investment in the NHS and push the annual rise in overall industry starts to a 13% surge.

Glenigan’s economics director Allan Wilén says: “An improving economy combined with rising public sector investment is expected to support growth in construction activity during 2026 and 2027.

“The upturn in consumer discretionary spending has been slow to filter through to related areas such as private housebuilding, retail, and hotels & leisure construction, but a further improvement in household incomes over the next two years is expected to support growth in consumer-related sectors.

“Whilst lower interest rates helped to support a recovery in industrial logistics and office construction this year, a firmer and broader rise in business investment is forecast from 2026 as strengthening economic growth and further interest rate cuts lift business confidence.

“Completion of the Spending Review has also now provided greater clarity and is expected to support a strengthening in departmental investment programmes during 2026 and 2027.”

Housing boost

The Labour government made a pledge to build 1.5 million homes over the course of this parliament. Starts were held back this year due to delays in securing approval from the Building Safety Regulator (BSR), but the regulator has pledged to clear the backlog by the end of this year, allowing greater headway to be made towards meeting that ambitious target over the next two years.

“Rising real incomes and further interest rate cuts are expected to lift house-buyers’ confidence from 2026,” explains Mr Wilén. “Supply side restraints are also expected to ease as the BSR reduces the backlog of projects awaiting approval.”

Glenigan expects the underlying value of private housing starts to climb by 6% next year then increase by a further 18% in 2027.

A swathe of approved major schemes is in the pipeline, such as the £75 million Sparkle Street development in Manchester (pictured above), which has planning permission and is expected to begin construction by Q2 2026 (Project ID: 24160638).

Social housing starts are estimated to have edged up 2% this year and will then grow at the same rate as the private sector in 2026 before increasing by another 12% in 2027, with the onus on low-rise housing. Mr Wilén adds: “Additional funding commitments in the Spending Review and greater access to private sector funding are expected to support a strengthening in housing associations’ development pipelines.”

A resurgence in student housing is also forecast by Glenigan as developers seek to capitalise on the exodus of buy-to-let investors from the student lettings market. Major schemes due to start in the next 12 months include a £90 million plan for 412 student units in Ealing, west London (Project ID: 23256125).

Private sector rises

The private sector is also expected to help drive growth in the office and industrial sectors over the next two years.

The office sector experienced growth in the underlying value of project starts this year, and that is forecast to continue into 2026, according to Glenigan’s construction industry research, with a 13% rise.

Mr Wilén explains: “Lower borrowing costs have renewed investor confidence, supporting a rise in both refurbishment and new build projects. While detailed planning approvals have been easing, there remains a strong pool of previously approved projects that can be brought forward for development.”

Office schemes with planning permission and expected to commence construction in the next 12 months range from the £80 million 31 Wellington Street development in Leeds (pictured above) (Project ID: 23071319) to the £200 million 65 Gresham Street development in the City of London (Project ID: 22373407).

This year, the industrial sector suffered from geopolitical instability and US tariffs that have held back manufacturing investment, but logistics work remained buoyant. Glenigan expects demand from online retailers to drive up underlying starts with a 12% leap next year. This will continue into 2027, when starts are forecast to grow by another 13%.

Major industrial developments with detailed planning permission and due to start in the next year include the £55 million Dynamo Park in Stockton-On-Tees (Project ID: 20311848) and the £100 million Capitol Industrial Park in Brent, North London (pictured above) (Project ID: 17133454).

Health improves

Increases in tax in Chancellor Rachel Reeves’ forthcoming Budget are widely viewed as inevitable as the Chancellor seeks to stabilise the Government’s finances, safeguarding promised increases in public investment in construction.

The NHS is already expected to be a key beneficiary even before any tax rises. Underlying starts are forecast to slump by 24% this year but will then advance by 4% in 2026 and increase another 15% in 2027.

“The Spending Review and NHS plan signal a sustained increase in capital funding, which will take effect from next April,” says Mr Wilén. “This is expected to enable NHS trusts to address the repair backlog across the existing estate.”

The £45 billion hospital rebuilding programme (Project ID: 19342017) will also create significant new-build and redevelopment opportunities.

The programme will run until 2039, but approved major schemes are already moving towards site, such as a £220 million Cancer Research Hospital in Cambridge (pictured above), where work should begin next year (Project ID: 21561465).

Underlying education starts are forecast to crash by 27% this year before rebounding strongly in 2026 and surging by 15%, buoyed by additional funding announced in June’s Spending Review.

Mr Wilén comments: “Current activity levels are expected to be supported by key schemes such as the school rebuilding programme (Project ID: 20264300), as well as ongoing commitments to address Reinforced Autoclaved Aerated Concrete (RAAC) issues in school buildings.”

The rate of growth in underlying education starts will slow in 2027, but is still forecast by Glenigan to increase by a further 4% due to more Spending Review funding for school building and further education projects.

 Civil surge

Moves to modernise infrastructure, integrate renewable energy, and meet rising demand for resilient and sustainable utilities provision are expected to produce a leap in civil engineering starts over the next two years.

In common with many other sectors, starts are expected to have fallen this year, but an estimated drop of 7% will be offset by a 17% rebound in 2026 and a further rise of 15% in 2027.

Mr Wilén explains: “A sustained increase in infrastructure projects is anticipated, following the Spending Review, which provided additional investment for the road and rail networks from 2026/27.”

Major highways schemes due to start in the next year include the £208 million North Hykeham Relief Road (Project ID: 18312717), while rail projects in the pipeline include a £672 million restoration of the Don Valley Line in Yorkshire (Project ID: 21513595).

This financial boost for the civil engineering industry will extend further. “Utilities work is also expected to grow, driven by higher investment in electricity generation and distribution to support the UK’s net zero transition, as well as increased capital spending by the water industry,” adds Mr Wilén.

Major frameworks are being set up by the water utilities to coordinate procurement of work in the AMP8/9 spending round. Thames Water, for example, is in the process of setting up a major projects’ framework, which will produce an outlay of £5 billion between 2026 and 2030 (Project ID: 25437009).

Accommodating future

Tax rises have the potential to hit consumer spending, and this could have a knock-on effect in the hotel & leisure and retail sectors, but the outlook is also improving.

Underlying starts in the hotel & leisure sector in 2026 are expected to moderate from the current rate, but Glenigan still forecasts a rise of 5% which could then grow to 12% in 2027.

Hotel & leisure schemes with planning permission and due to start construction in the next 12 months range from a £50 million aparthotel in Edinburgh (Project ID: 23166048) to a £90 million revamp of the Saville Theatre in London (pictured above) (Project ID: 18012420).

Inbound tourism is expected to increase, while regulatory changes should also help drive up investment in the sector.

Mr Wilén explains: “The introduction of permanently lower business rates multipliers for high-street retail, hospitality, and leisure properties in 2026/27 is also expected to stimulate hotel and leisure construction. This measure will reduce long-term operational costs, making investments in new developments, expansions, or upgrades more financially viable for businesses.”

After crashing by an expected 21% this year, the underlying value of retail starts is expected to be flat in 2026. Some major schemes are due to begin construction, such as a £106 million redevelopment of the Marks & Spencer store at Marble Arch in London (Project ID: 21108674) and the £80 million second phase of the St James Market development, also in London (Project ID: 19202120).

The overall outlook for retail construction work should then improve. “Retail project starts are expected to increase by 10% in 2027 as reforms to lower business rates for high street retail, hospitality, and leisure properties take effect,” Mr Wilén explains.

Positive outlook

With the outlook improving across a range of sectors driven by improvements in the wider economy and public sector investment, Glenigan expects the New Year to usher in a period of sustained growth in workload for the construction industry. Download Glenigan’s latest forecast for the full analysis.

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