Galway must up its game or live on Dublin's crumbs
Decision time is looming for Galway on whether it wishes to remain one of Europe's best micro cities or step up in league.
It will become European Capital of Culture in 2020, which would offer an opportunity to showcase the city for foreign direct investment as a means of becoming a major counterweight to Dublin's galloping growth.
The clock is also ticking on Brexit but the city has been slow to address the few opportunities that it may present.
If the City of the Tribes intends to exploit Dublin's difficulties its window of opportunity may be limited in time as the capital responds to pressure from home-seekers, the media and opportunistic developers to address its weak housing supply.
Already Dublin has seen 30 office schemes totalling more than 370,000 sq m (4m sq ft) under construction and a further 47 schemes with planning permission. Cork has also seen a few office schemes get underway in the last two years. Yet both of those cities have higher office vacancy rates than Galway, where vacancy rates have been running in single figures for a number years and stood as low as 8pc at the end of 2016.
Consequently, because of the reluctance of developers to address Galway's office shortage and undertake speculative projects, one international employer decided to develop its own premises. In addition, the IDA has just this month broken ground in a relatively rare move of undertaking a speculative office development. It granted the tender to build a 4,200 sq m (46,000 sq ft) facility at Parkmore Industrial Estate to the Stewart group.
The only developer currently undertaking a city centre office project is the O'Malley Group, which is redeveloping the Hynes Building on St Augustine Street, most of which will be occupied by Met Life, except for the part of the building that the city library will retain on the ground floor. Including a new fourth floor, the development will provide a total gross floor area of 6,835 sq m (73,582 sq ft).
George Brady of Cushman & Wakefield estimates that currently only about 5,600 sq m (60,000 sq ft) of modern offices are available to let in the city centre and he expects that about 930 sq m (10,000 sq ft) of that will be taken in the coming weeks.
As much as 1,860 sq m (20,000 sq ft) of the vacant space is in I Galway Central, the former Anglo-Irish Bank building purchased by the Comer Brothers. The remaining vacant offices are spread among four other buildings, so there is very little choice for employers that may want to locate a large number of staff in one building.
Consequently Brady predicts that all vacant space will be taken within the next 11 months, if not before the year end.
"Many of the recent office occupiers are growing rapidly and will be looking to more than double the amount of offices they require within a few years," he adds.
With no further office development under way, there may be no extra space available in the city centre until 2020, when Gerry Barrett's planned Bonham Dock may come to fruition. It will provide 25,900 sq m (279,000 sq ft) of offices in four buildings beside the docks.
Barrett's move is the latest indication that developers are at last beginning to hope that rising rents will make office construction viable.
Other indications were seen in some recent deals. For instance, Woodquay Court offices were recently purchased by a private Galway investor for around €2.5m, or at least €800,000 more than the €1.65m guide quoted by Brady. The four storey over basement office block was built about 40 years ago and extends to 1,486 sq m (15,995 sq ft).
In addition, a 6,500 sq m (70,000 sq ft) redevelopment of a leisure centre property into offices is under way in Oranmore on the eastern approaches to the city. Meanwhile, to the west of the city, one of the Oaktree Capital companies is believed to be at the pre-planning stage for phase two of The Gateway Retail Park in Knocknacarra, which will include about 3,344 sq m (36,000 sq ft) of offices on the floors over new ground-floor shops.
While these suburban office projects will help address demand, one local agent says that many of the foreign direct investment companies want premises in or near the city centre in order to help them to attract young talented staff who wish to go to restaurants and pubs in a buzzing city centre after work.
As has been the case elsewhere, one of the problems about encouraging private sector speculative development is the relatively low office rents. Recent letting deals suggest that this is also being addressed.
Cushman & Wakefield estimates that prime Galway city centre headline rents rose by 14pc to about €24 per sq ft by the end of 2016.
In the suburbs rents also rose by 14pc to €17 per sq ft per annum.
But such rents are less than half the €55 per sq ft being quoted for some prime Dublin offices and they are also below those in Cork, where they rose by 16pc to €27 per sq ft by the end of last year.
Some agents reckon that rents need to exceed €30 per sq ft in order to encourage new office projects in Cork and Galway and it looks like they are in sight.
Brady is already revising his forecast for Galway office rents.
"We had expected that they would increase to €27.50 by the end of this year but already only four months into the year we have seen a deal for €26 per sq ft and now we are quoting €27.50 per sq ft for other offices," he says.
He has also brought forward his forecast for when rents might reach €30 per sq ft. In January it was reckoned that investors might have to wait until the end of 2018. Now they are expected to reach these levels by the first quarter of next year at the latest.
An interesting test of the investment market will be Fáilte Ireland's sale of its Galway tourist office on Forster Street, for which Sean Coyne of Cushman & Wakefield is quoting more than €2.25m. A two storey over basement building, it has potential for retail or restaurant use on the ground floor and offices on the first floor on a corner with a busy tourist and commuter footfall.