Two years ago, when London was the center of the financial world, developers imagined a set of wild new skyscrapers to meet the demand. Now, London finance is falling down and so too are many of those unbuilt towers.

The latest casualty: a $495 million, 47-story office tower whose wedge shape led the press to dub it “the Cheesegrater.” British Land recently announced the postponement of the development until at least 2012, even as the demolition of the previous office building at 122 Leadenhall in London's central financial district neared completion.

The reason a hole in the ground is now considered a better investment than a new building is that the economic rationale is gone. These days some projects no longer pencil out even if the land is free, says Bill Page, an analyst for Jones Lang LaSalle in London.

Developers aren't the only symptom of distress. Cap rates, recently lower than British government bonds, now stand at just under 6%. Office sales volume this year has only been a third of what it was in 2007, reports JLL.

In the first three quarters of 2008, $4.8 billion in office properties traded hands compared with $15 billion in the same period a year ago. Rents have fallen 9% year-to-date through October.

Despite the canceled projects, 3.7 million sq. ft. of new office supply will come on line by the end of 2009, adding to the existing 103 million sq. ft.

Now tenants are gaining clout. Landlords are granting incentives of up to 21 months of free rent on a 10-year lease, Page says. This trend has led to a drop in net effective rent by 18% to $84.16 per sq. ft. He expects the free rent to extend up to 28 months next year.

The market strife is creating opportunities. Page says next year could well be “the best buying opportunity of the next 10 to 20 years.” German investors have already swooped in with $1.69 billion this year, and American opportunity funds may not be far behind, reports JLL.

Even for investors who stay out of London, the ripples of the market's fall are likely to continue for some time. Those aftershocks may be most intense in New York given that the two cities shared many common tenants and lenders.

Other major office markets may also feel some ripples. Real Capital Analytics (RCA) notes that commercial property buyers in London and New York spent nearly $4 billion in Paris over the first three quarters.

Singapore also may be positioned to gain capital that might have been spent in London or New York, as investors look for diversification.

Cities with less exposure to the financial sector also hold appeal. RCA, which tracks top destinations of this year's buyers in London and New York, says that the new London entrants also liked Madrid, where they have invested $6.1 billion. After Paris, New Yorkers liked San Francisco, where they invested $876 million.