Can the office market in the capital cope with the occupier demand?
LAST year and 2011 were the first two years since our records began in 1964 that there was no new office construction in Dublin and 2013 looks set to become the third.
With falling rents and tightening of lending over the last six years, construction has stalled with limited activity across the sector.
The halt in development is a logical response to the events of 2008/2009 and is positive for reducing vacancies.
Supply remains high with 7.5m sq ft of space currently vacant (18.9pc vacancy rate), but with strong take-up and no completions, supply has been gradually decreasing.
A key issue is the level (5.7m sq ft) of secondary product in the market and some occupiers are faced with a decreasing choice for prime product.
If an occupier wants prime space in a specific location, they could be limited to one or two buildings in certain size categories.
The office occupier market has performed strongly over the last two years, with healthy take-up levels above 1.5m sq ft and steady activity in the year-to-date.
Demand remains strong, particularly from technology companies, and we are currently aware of in excess of 1.5m sq ft of active requirements in Dublin from a broad range of occupiers looking for prime quality space.
As a short-term solution to tightening supply in certain locations, landlords of older vacant buildings are actively considering refurbishment. With further pressure on secondary rents and rental growth forecast for prime space this year, there are emerging signs that spending money upfront to upgrade buildings is beneficial to landlords in the medium-to-long term, provided the building is well-located and capable of a proper upgrade.
In the last 12 months, refurbishment of some high profile buildings in the city centre has taken place, including the Shelbourne Building on Shelbourne Road in Dublin 4.
Now 60pc of the space in Blocks 1 and 2 is already pre-let, with IBM relocating its Irish HQ to the complex.
Depending on the quality of works undertaken, headline rents for refurbished properties could achieve up to €28-32 per sq ft compared to €16-20 for secondary unrefurbished space.
In addition to refurbishment, it is expected that we will see limited development commence in the next 12-18 months. This will be on a highly selective basis.
The first movers will be few and cautious and will seek to derisk development by pre-letting, with commitment from an occupier needed before construction commences.
Some developers are already taking first steps into site purchase in preparation for a more normal development phase in the future.
We will also start to see speculative development in the medium-to-long term when confidence returns to the market.
There is some evidence of rental growth up to €32 per sq ft, but only for a select few prime office buildings.
Even at this level, development economics are challenging, but our forecasts show that rents are expected to increase to €35 by 2015, caused by increased competition for prime stock.
At around €35 per sq ft development economics can make sense, although this does depend on specification.
Decreasing prime office supply, forecast rental growth, strong demand and the return of banks to lending suggest we should see some limited office development commence in 2014.
Hannah Dwyer is head of research, Jones Lang LaSalle Ireland. More about this topic, can be downloaded from the research pages at www.jll.ie