(Bloomberg) -- For London office developers at least, the Brexit waiting game is over.
Developers mostly steered clear of doing new projects on spec in the political upheaval that followed the U.K.’s 2016 vote to leave the European Union. Now the surprising resilience of London’s office market, highlighted by technology giants like Alphabet Inc. committing to open new bases in the city, has convinced them that it’s time to break ground.
You don’t have to look hard for evidence of this resurgence. Behind that famous wall of digital billboards on Piccadilly Circus, Land Securities Group Plc is redeveloping the building at 1 Sherwood Street. It’s the first time in about five years that the company has started a project without lining up tenants in advance.
“London’s office market remains resilient in the face of uncertainty as we witness an encouraging increase in new construction starts,” said Mike Cracknell, a director at Deloitte Real Estate. “This is testament to developers’ continued confidence in London’s office leasing market long term.”
Read more: Brexit Blues Hit House Prices in Almost Every London Borough
Demand for offices in the skyscrapers of London’s financial district and the grand squares of the West End has defied expectations of a crash since the Brexit referendum, even as the capital’s housing market has been weighed down by the political malaise. And after several years of restrained building, that demand has spurred developers into action despite chronic uncertainty about the final terms of Britain’s divorce from the EU.
Private equity funds, U.K. real estate investment trusts and overseas developers are snapping up vacant buildings and starting new projects. British Land Co. has submitted plans for its largest-ever development in London’s Southwark borough, and will decide before the Halloween Brexit deadline whether to start a large office project in the Shoreditch area without first signing up tenants.
“Across the business we have leased more space this year than in any of the last five years,” said Simon Carter, British Land’s chief financial officer. “We have benefited from the fact that supply has been pushed back but demand has remained good.”
Other firms catching the wave include asset manager Allied London, which is in talks to buy ITV Plc’s former television studio complex on the south bank of the River Thames, according to people with knowledge of the matter. The site has approvals for a 31-story tower including apartments, offices and studios, they said. And Great Portland Estates Plc is in negotiations to buy BT Group Plc’s headquarters next to St. Paul’s Cathedral, and plans to redevelop the site, said people familiar with the situation.
Representatives of Allied London and Great Portland declined to comment.
Helical Plc and Ashby Capital bought a development site in the Farringdon district with plans for a large office building, according to a statement on Monday. “We view this as positive, especially with Helical completing developments this year we are looking for capital redeployment as a theme,” JPMorgan Chase & Co. analysts including Tim Leckie wrote in a note.
Developers started work on 37 projects comprising 3.5 million square feet (about 325,000 square meters) in the six months through March, according to a Deloitte report published on Monday. That’s the equivalent of about seven Gherkin skyscrapers and the most since the start of 2016.
“The London skyline is one of the most obvious indicators of investor confidence in the City,” government International Trade Secretary Liam Fox said in a statement.
London development plots with space for about 6.7 million square feet of buildings have been put up for sale or traded since the start of the year -- the most on record, according to data compiled by broker Savills Plc.
“Across Central London, the appetite for development and refurbishment opportunities is almost unabated,” said Robert Buchele, a director at Savills. Sites are commanding near-record prices because of the shortage of vacant office space, and traditional developers have run low on existing buildings to overhaul, he said. In addition, investors are ready to assume the greater risks of speculative development as they seek higher returns, he said.
Not everyone’s bullish, however.
Tom Sharman, head of research and strategy for real estate finance at Royal Bank of Scotland Group Plc, said take-up has been “flattered somewhat” by serviced-office companies. “We maintain a cautious stance on the London office market,” he said.
With construction not yet underway on about 30% of the office space due to be built by 2020, projects already underway are facing less competition, according to British Land. As a result, about 65% of space currently under construction has already been leased, the REIT’s data show.
But much of that space has been taken by flexible workspace companies such as WeWork Cos., which has rapidly grown to become the city’s biggest private office user. That creates uncertainty for developers about the extent to which the space is occupied, and runs the risk that flexible companies could become major competitors for tenants if demand falls and they slash rents to attract new occupants.
(Updates with analyst’s comment in 10th paragraph.)
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