Can the commercial market maintain its current growth level?
Dublin's office market has been characterised by a lack of supply in recent times. This situation, coupled with a surge in occupier demand, has fuelled rental growth and seen prime central business district quoting rents head back towards peak-2007 levels of €65 per sq ft.
All of these factors have heightened levels of confidence among some landlords as they enjoy the rare and enviable position of agreeing deals at near record levels and giving little away by way of incentives. Good luck to them - it's their time. However, this position of strength may soon have to moderate as a new wave of speculative development of some 1.75 million sq ft of new space hits the market in the next 12 months.
We have reached a point in the cycle when the true market temperature needs to be checked and this is best done by analysing current deals. The imminent completion of two major pre-lets of over 100,000 sq ft and another of 30 to 40,000 sq ft in Dublin 2 and Dublin 4 will be welcomed by all landlords with new schemes under construction.
It gives them confidence that they too will find occupiers for their schemes.
Significantly for the market, these deals are believed to have been secured on realistic terms with incentives. This is welcome news for tenants and also we believe for landlords. It proves that occupier demand is holding up. Deals are there to be done if a pragmatic approach is adopted by both sides.
For the most part, occupier demand appears relatively stable although there are some concerns that the depth of tenant mix in the 5,000 to 20,000 sq ft range perhaps isn't as great as we would expect. This may be down to occupiers re-gearing leases instead of moving premises due to high rents and lack of any meaningful choice. This will change as more space becomes available and if lease terms and rents moderate. There is a feeling that some occupiers have perhaps been hiding in the shadows and will emerge with more active requirements when they are feeling more confident that sensible deals are being offered.
Occupiers - particularly in the tech, creative and digital sectors - are becoming increasingly frustrated with the lack of flexibility in the market. While they are often prepared to pay market rents for the best space, they are less prepared to be locked into onerous leases of 10 to 15 years, preferring to look for a three to five year term.
"Old school", prudent landlords have identified this sentiment and responded with a more flexible approach. In some cases, they have achieved better rents in return for offering shorter-term leases. Elsewhere, they have simply recognised the benefits of securing a pre-let and de-risking a scheme. In a market known for dynamic and innovative occupiers, landlords who adapt to the market temperature quickest will grab deals.
Looking ahead, although the current wave of speculative development triggers some worry about over-supply, we believe the market fundamentals can support it. Occupier demand should remain relatively stable based on existing corporate requirements and demand for expansion space among the tech/creative/digital sector. Provided the new found "meeting of the minds" between landlords and occupiers continues to prevail, we can expect deals to be done.
Prime rents will eventually settle at more sustainable levels of approximately €55 per sq ft for market leases which contain tenant break options between years 10 to 15. There will always be "outliers" for the very best space in town or for short-term leases, but there is a general belief the market will peak at around €60 per sq ft as opposed to the €70 mark that has been touted by some over the past six to nine months.
Landlords who are sensible will secure deals. Those who chase the peak may be fooling themselves with unrealistic expectations that simply won't be supported by occupiers.
James Mulhall is Managing Director of Murphy Mulhall