Millions of square feet of office space in the pipeline
More than 10 million sq ft of new office development as well as refurbishment projects are possible for Dublin's Central Business District during the seven years until the end of 2021.
However as much as 2.3 million sq ft of office space would have to be withdrawn from the market before the end of 2017 to make way for new developments according to research by Savills. Consequently the stock of prime offices will fall by 847,000 sq ft in 2015 and 2016 before increasing to a total of net increase of 7.4 million sq ft over the six year to 2021.
In the meantime the level of withdrawals is adding to the upward pressure on rents projected for between now and 2017.
CBRE in its latest report says that prime office headline rents in Dublin are now in the order of €538 per square metre or €50 per square foot although negotiations are taking place in excess of this level and CBRE says rents will continue to rise.
Others analysts such as Davys forecast that rents could reach €70 per sq ft next year.
Now the question arises as to whether forthcoming rental increases will be pared back after 2017 when more of the new and refurbished space comes to the market. Andrew Cunningham, who is head of office agency at Savills, says that developers of the new space appear to be pricing in growth up to 2018.
Savills are acting for clients with space requirements in 2018 and are finding a wide range of rental expectations among promoters and developers.
Another view is suggested by CBRE's Marie Hunt in that firm's latest bi monthly market report.
She says tenant demand "has weakened a little over recent months with most current active requirements relatively small in size…many of the larger requirements in the market have now been satisfied or are close to being agreed with several technology companies in particular having leased additional accommodation in anticipation of shortages at this point in the cycle.
"The next wave of take-up in the Dublin office market is most likely to emanate from indigenous occupiers," Ms Hunt added.
One of the most significant new requirements to materialise in the last few weeks is a requirement from the National Treasury Management Agency for between 6,500 sq m (70,000 sq ft) and 7,400 sq m.
Mr Cunningham says that the rents being quoted suggest that developers are testing the market to see if they are getting their prices right and assessing if they are giving value for money versus their peers.
One of the factors that may be encouraging this stance is that more than 800,000 sq ft of the offices in the CBD pipeline has already been committed to occupiers. These include projects such as Arthur Cox's offices on Earlsfort Terrace, the Central Bank in docklands and Kennedy Wilson's pre-let of a Baggot St office to Bank of Ireland.
Another factor encouraging development has been the fall in vacancy levels with some agents estimating that the Dublin office vacancy rate is now back at pre-crises levels at around 12pc and in the prime Grade A south side CBD vacancy rate is less than 2pc.
However Mr Cunningham recognises that not all of the projects may be developed in the medium term. Some owners may wait unit they secure pre-let agreements or they may hold sites with a view to selling them later in the cycle rather than developing them.
On the other hand because of the 'sweet spot' in the market between now and 2017, a number of developers are hurrying to get their projects completed to take advantage of demand from good tenants as well as the rental increases that are expected during that sweet spot.
This rush to market has also led some property owners to opt for refurbishment rather than re-development. Mr Cunningham says that the market should factor in the possibility of refurbishments generating up to 1.2 million sq ft during the six years until 2021.
"It is impossible to forecast how much space may come from refurbishment because of the difficulty of forecasting which landlord will be left with space which they may decide to refurbish," he adds.
Among those active on the refurbishment side are institutions such as Irish Life and Aviva, as the latter is now putting the finishing touches to its refurbishment of 7 Grand Canal, Street with 25,822 sq ft of Grade A offices which will be ready for occupation in September. JLL is quoting €47 per sq ft. for this.
But not all refurbishments will lend themselves to the top class building standards required by some multinational tenants. Most new developments are being built to the Gold Lead standard and some are aiming for even higher Platinum Lead ranking.
But some second generation offices which are being refurbished don't have the floor to ceiling heights which can accommodate the energy efficient systems of those lead standards. Consequently while they may have the short-term advantage of delivering within the sweet spot, they may not be able to compete in the longer term for tenants that require high standards.
Among the developments due to come to the market this year are Jones Investments' 4,182 sq m One Building at 1 Grand Canal St, Dublin 2; Larry Goodman's redevelopment of the former Bank of Ireland HQ on Baggot St, now known as Miesian Plaza and Rohan Group's 21 Charlemont, a 35,000 sq ft six storey office development next to a Luas stop. It is expected to be completed by next summer according to Simon McEvoy of JLL.
Last week Irish Life submitted a planning application for a 58,000 sq ft office development at Hainault House next door to Denis O'Brien's LXV on Stephens Green.