Business Irish

Saturday 3 December 2016

Occupiers to face less office choice

Roland O'Connell

Published 29/02/2012 | 05:00

WITH A construction drought not seen in over 50 years, 2012 will be remembered in the Dublin office market. For the first time since the Savills/Centre for Urban and Regional Studies Modern Office Annual Survey was initiated in 1960 no new purpose built modern office building will be completed in the city or suburbs. Indeed, at this stage it is likely that this may be repeated in 2013.

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Many people will regard this as a good thing -- the office market is suffering from a huge overhang of vacant buildings and the last thing we need to do is add to this.

Indeed, as financial services companies serving the indigenous market (AIB, Bank of Ireland, Aviva) contract they will release more space back on to the market, maybe as much as 50,000sqm in 2012.

Demand, largely from Foreign Direct Investment (FDI) companies, has been buoyant over the last 18 months with 148,000sqm let or sold for occupation during 2011. This was above the 10-year average which is a robust performance.

While our corporate tax rate is very important in attracting and growing FDI, there are a number of other essential ingredients needed to achieve growth. Availability of staff at competitive salaries is an obvious one but so is the availability of good quality office space in convenient locations at a reasonable cost.

There has never been such a wide choice of good quality offices and at such a low cost as there has over the last two years. You could be forgiven for thinking that the future looks bright as there is an oversupply of offices equivalent to over four years take-up so no need to worry for a few years yet.

Unfortunately we will have to start worrying sooner rather than later if we don't want to see a classic rental spike and consequent loss of competitiveness.

The reason for this is simple. As rents have dropped, office tenants have favoured the best buildings available, often vacating older almost obsolete buildings.

Therefore while the total amount of vacant space has fallen only marginally over the last year or so, the quality of vacant space has declined at a much more rapid pace.

Much of the currently vacant stock, in my estimate about 20pc, is obsolete either due to its condition or location or both. Hard though it may be to believe there are even new buildings which are obsolete either due to their poor design or inappropriate location.

But while those in the market can see the lack of choice developing in many size categories, especially in the city centre, current lease terms, rents and yields will not justify new development or indeed significant refurbishment of older buildings.

Large companies looking for 10,000sqm or more in Dublin 2/4 currently have two new buildings from which to choose. A medium-sized company looking for 5,000sqm or more in the same area would have 10 new or second-hand buildings from which to choose.

The picture is very different for those looking for 2,000sqm or less as here there is a wide array of choice.

2012 could be the year of change in the market. No new buildings will be completed this year and not unconnected to that we are likely to see signs of rental growth in the small subsectors of the market where supply is most limited. For example, Bank of New York Mellon are currently considering sites where they could enter into a pre-letting agreement for a building of approximately 16,500sqm. To agree a deal it is likely they will have to commit to a longer term than is the norm in the market at present and also pay a higher rent than has been achieved in recent years -- most probably above €377 per sqm.

At the other end of the size spectrum, two small floors of 300sqm or so, one in a new building and one substantially refurbished, have been let at €344 per sqm.

So we are beginning to see a further fracturing of the market with rents hardening for the very best space in under-supplied subsectors, while rents have stabilised for most other sectors.

The problem lies though in the length of time it takes to initiate and complete new office buildings. From site purchase to completed building is seldom less than three years and usually longer.

Therefore there is a distinct lag between shortages becoming evident and new product being delivered to meet the demand.

In current conditions where finance is hard to find and developer is a "dirty word", we may find that the lag time is longer than ever previously experienced. Therein lies the problem.

In a market where there is consistent demand for good quality space but no new supply of it, we will face an unacceptable scenario. Either new businesses or existing ones wishing to expand, will not be able to do so and therefore will locate in other countries, or else through competition for the limited supply available will drive rents up to an unsustainable level.

Neither solution is one which should be acceptable to a country which is more dependent on mobile FDI to create and sustain employment than any other in Europe.

Developers, investing institutions and property companies are needed to supply the workplaces of the future and we should urgently turn our attention to ensuring we have a system to provide a steady supply of competitively priced work places which will meet the requirements of the most modern employers we wish to attract and retain.

Roland O'Connell is vice president of the Society of Chartered Surveyors Ireland and director of Savills.

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