London office property prices have stayed surprisingly high since the Brexit vote to leave the European Union (EU) in mid-2016. A recent rise in vacancy levels (from a low base) hasn’t yet made a dent in high rent costs, while low transaction prices have attracted foreign buyers lured by the post-Brexit fall of the British pound.

But that might be about to change. There’s a high level of new office construction coming to market just as demand appears to be faltering. Are rent prices like Wile E. Coyote after he has run off the cliff, but before he has looked down?

So far, so good

Demand for office space has stayed healthy since the Brexit vote. At the time of the vote, several multinational banks talked about relocating staff to Frankfurt, Dublin and other cities inside the EU; to date, very few have actually moved. And banks aren’t the only tenants in London—technology firms have been a big source of office demand.

Both Google and Apple are planning large new London headquarters. The unglamorous area around Old Street roundabout has become an unlikely hub for technology startups, and is now nicknamed “Silicon Roundabout.”

Over the cliff?

Headline rents have stayed high, but landlords are offering longer rent-free periods to new tenants, which is a significant indicator of effective rents falling. Additionally, supply of new office buildings over the next three years is likely to be above its long-term average, with a significant proportion that is not pre-let to tenants1. London office rents and investment property prices could fall 10-20% over the next two years, with some risk of a worse downturn.

In March, British Land sold its stake in the “Cheesegrater” building to a Chinese buyer for £1.1bn. This sale may mark the peak of the London property cycle and the harbinger of price declines, just as the sale of HSBC’s London headquarters in 2007 for £1.1bn marked the previous cycle’s end2. Some of the UK’s largest property companies have been strengthening their resilience to a downturn by selling investment property and paying down debt. This puts them in a good position to buy land for future development cheaply if prices do fall.