(Bloomberg Gadfly) -- It's been almost a year since the Brits voted to quit the EU. Yet there's still no sign of a mass exodus from London's gleaming office towers. It helps that Brexit hasn't happened yet, while a weak pound provides a cushion. But longer term, the market is at the mercy of hipsters and bankers.
The construction bubble in the British capital, fueled by international money and cheap credit, has yet to deflate. There was a 6 percent dip in the amount of new office space being built in London during the six months to March, according to Deloitte. But that still leaves 39 million square feet of new supply to be developed over the next five years. That's potentially the biggest chunk of new space since the 1990s.
Whether there's demand for this depends on two sectors: tech and finance. Both have proven willing tenants even after the Brexit vote. Apple Inc. is turning Battersea power-station into its London home, while Facebook Inc. is moving close to the media watering holes of Fitzrovia. Goldman Sachs Group Inc. and Deutsche Bank AG are sticking with plans for new London headquarters.
With vacancy still low by historic standards, rents have held up. One square foot of prime City real estate would have cost 70 pounds ($91) at the end of 2016, according to property firm JLL, unchanged from a year before.
But the future's much fuzzier. Tech's expanding footprint in the capital has turned the relatively simple business of just throwing up more towers into a Silicon Valley-inspired arms race for the hippest, most inspiring workplace cathedrals (think Apple's flying spaceship in San Francisco). Meanwhile, cash-strapped banks are squeezing staff into new digs to consolidate multiple offices into one. Both these tendencies leave empty properties in their wake, according to Bloomberg News. With even more supply coming, rents may end up suffering.
And that's without considering the lingering Brexit impact. JPMorgan Chase & Co. plans to shift hundreds of London bankers to offices in Dublin, Frankfurt and Luxembourg. It's not alone. And while access to EU financial markets is less of a problem for techies, a British crackdown on immigration might send talented entrepreneurs elsewhere.
Does this merit the market fears about a property meltdown? Most U.K. real estate shares still trade below pre-referendum levels. British Land Co Plc's share price implies a 27 percent discount to the value of its assets, according to UBS. That's pretty gloomy considering the support from low interest rates and a weak pound.
Plus some firms think they can prosper by targeting a more diffuse client base post-Brexit. British Land will soon offer a "flexible workspace" product to capture more startups and small businesses, and is betting on restaurants and mixed-use spaces.
But talk of tech trends and emerging food fashions won't win over the harder-headed investor. Supply and demand dynamics do seem to be pointing to a significant rise in capacity just as appetite comes under pressure. The tech sector has picked up the slack in recent years, but there's no killer app for empty office space.
Elaine He contributed graphics
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.
To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.