MIDLANDS
The mechanical and electrical sector in the Midlands has experienced a mixed first quarter of the financial year with some record turnovers and a contrasting high level of insolvency.
There in an increase in project demand flowing from renewed investment and focus on sustainability and decarbonisation related projects, with several large projects announced by regional councils, new government schemes, and private investment by firms eager to meet their ESG and carbon emissions reduction targets. In the region, a large battery storage facility project has been proposed, Birmingham City Council has announced £265m of energy efficiency upgrades for homes, and EV charger infrastructure works continue.
Despite this increase in demand, insolvencies among contractors are higher than last year, with specialist subcontractors suffering the greatest losses. This is in part due to sustained high plant and equipment prices, long lead times, and increasing labour costs (14.8% uplift on the first quarter for some specialisms due to lack of specialist labour supply in the region), while subcontractors are still expected to fix prices with main contractors.
MARKET CONDITIONS & PIPELINE
Lower inflation and interest rate cut spurs investment activity
The Midlands construction sector has reported an increase in new project starts during the quarter with the forward pipeline looking promising. This follows the postponement of several projects in the previous two quarters, a reflection of the impact of high interest rates on the cost of development finance.
Following the rate cut announced by the Bank of England on 1 August, with further cuts this year anticipated, there are signs of increased private investment activity across a mix of sectors. There is expectation in the market that a continued reduction in input cost inflation will also help to unlock mothballed investment plans.
The alleviation of construction cost pressures in key materials has already helped to improve project viability. Contractors remain keen to tender for projects as they vie to fill order books, but insolvency in supply chains remains a hot topic. This could lead to potential supply chain consolidation and contractor re-assessment of attitude to risk.
There is strong, rising demand from tenants for Category A office space which is currently outstripping supply. Schemes, across all sectors, are still being delayed by backlogs in the planning process, due to the lack of resource within the region’s local authorities.
RLB Market Activity Cycle
The RLB Market Activity Cycle is a representation of the development activity cycle for the construction industry.
RLB considers 10 sectors to be representative of the construction industry as a whole. Each sector is assessed as to which of three activity level zones – peak, mid or trough – best represents the current status of the sector within the cycle. This assessment is then refined by identifying whether the current status is in a growth phase or a decline phase.
The subjective current performance of sectors is identified by ascribing one of the coloured arrows (shown in the legend of the chart) to each sector. NB: In this analysis, sectors are not individually weighted.
▲ Peak Growth ▲ Mid Growth ▲ Trough Growth
▼ Peak Decline ▼ Mid Decline ▼ Trough Decline
Market sector activity analysis: Midlands
▲ Peak Growth ▲ Mid Growth ▲ Trough Growth
▼ Peak Decline ▼ Mid Decline ▼ Trough Decline
Consolidating the results of a region enables the calculation of a regional representation of percentage of sectors in each phase of the cycle at a point in time.
Market sector activity analysis: United Kingdom
▲ Peak Growth ▲ Mid Growth ▲ Trough Growth
▼ Peak Decline ▼ Mid Decline ▼ Trough Decline
Consolidating the results of multiple regions enables the calculation of a national representation of percentage of sectors in each phase of the cycle at a point in time.
TENDER PRICES
Inflation rate will reduce slowly despite growing labour costs
In the short term, we anticipate the rate of tender price inflation in the region to slowly reduce, with the overall increase resultant from the continued rise in labour costs.
Looking beyond the next 12 months, a stable but upward trend of annual inflation at around 3% to 4% is forecast.
Tender price change
▉ RLB Midlands
▉ BCIS (National) TPI ▉ BCIS (GBCI)
▉ Competitors (High) ▉ Competitors (Low)
INPUT COSTS
- Increases in material costs have typically been small during this quarter, in line with overall inflation.
- Reductions in rates for earthworks movements are reflective of the fall in diesel prices. Steel and cladding costs are back to what the market would consider ‘normal’.
- Labour rates appear to be steady but are likely to increase as we move into 2025.
SECTOR FOCUS
Commercial
There is already a shortage of premium commercial space across the Midlands, and that gap between supply and demand is only going to grow wider in the coming years. With indications that rental rates for Cat A office space within the region are likely to reach £45 per sq ft, this is a much-needed spike which should help developers keep pace with construction cost inflation.
Education
The fall in international students coming to the UK is clearly impacting the ability of the region’s higher education institutions to invest in their capital estate plans. Several universities across the Midlands have initiated voluntary redundancy schemes, and estate plans have either been paused or stopped in their entirety.
Healthcare
We have seen a slight pause in workload pipeline as the sector awaits clarity on the new government’s spending plans. Fire advisory services remain in demand as NHS Trusts continue to upgrade the fire strategies for their estates.
Logistics and Manufacturing
Despite a slow start to 2024, there is growing optimism in this market with several schemes now progressing. Cost reductions in key packages (steel, cladding and earthworks) are promising to tip the balance in favour of new development, along with the view that interest rates will continue to fall, albeit slowly. We are seeing increased interest in small box development sites (circa 100,000 sq ft).
Public and Civic
With a change in government and a new Mayor of the West Midlands Combined Authority, Q3 and Q4 of 2024 should see an upturn in projects as funding becomes available. Construction of HS2 continues to create development opportunities in areas surrounding the new rail network’s stations and infrastructure.
BIRMINGHAM, UK
One Centenary Way
RLB played a key role as contract administrator and quantity surveyor for Mills & Reeve’s new Cat B office fit-out at One Centenary Way in Birmingham.
The project aimed to create a sustainable, inclusive and collaborative workspace to reflect the law firm’s values. RLB was instrumental in managing costs, ensuring that the project adhered to budget and timeline pressures while meeting high sustainability standards.
The 32,000 sq ft office space has flexible layouts and reflects local architectural elements, providing a dynamic environment to support various work styles and activities while creating a strong sense of community among colleagues.
