Tuesday 17 September 2019

Paul McNeive: 'Tech and creative sectors forcing SMEs out of town'

The right moves

Paul McNeive
Paul McNeive

Paul McNeive

The office market in Dublin is booming, with record rents, record levels of supply, and a near record level of take up of 1.75 million sq ft, to date this year. Happy days for developers and landlords, but a consequence of this is that small and medium sized companies (SMEs) are being squeezed out of the market. Amidst all the razzmatazz, top office agent James Mulhall, managing director of Murphy Mulhall, is voicing concerns about the effects of this market on SMEs - and questioning its sustainability. I spoke with him to hear more.

The boom in the market is largely driven by the tech/creative/digital (TCD) sector, most of which is incoming multinationals. Tenants like Salesforce, Amazon, Facebook and WeWork are devouring enormous amounts of space and this has led to developers constructing increasingly large buildings, with very large floor-plates. This plethora of lettings of buildings to single occupiers is seeing small and medium sized occupiers squeezed out of the market -especially under 10,000 sq ft lot sizes.

James Mulhall was particularly struck by this when he recently searched the Dublin 2 market for two clients requiring under 10,000 sq ft. A similar search last year yielded 14 possible options, but this year's list was down to eight. And in reality, he told me, most of those were unsuitable.

Tenants expecting to locate in the central business district (CBD) are having to consider the city fringes, or older, refurbished buildings. Some are re-locating to suburbs like Sandyford Business Park.

The main reason is that landlords, whose buildings are under construction, or indeed completed, are holding out for lettings to single tenants, and are reluctant to consider offers for individual floors, as was traditionally the case. Even where a floor may be available, landlords are holding out for longer leases than SMEs want.

The result, Mulhall warns, is that the long enduring base of mostly indigenous SMEs, who represent a large part of the economy, either cannot expand or are being forced into unsuitable locations, on undesirable lease terms.

This is a new and interesting dynamic in the market, and is probably caused by not only the pipeline of large occupiers, but low interest rates and private-equity financing, allowing landlords to forego the "bird in the hand" offer for part of a building.

Another advantage of letting to a single occupier is that lobbies and common areas remain as rentalised floorspace, which trumps the argument for reducing risk by letting to a selection of smaller tenants, even at higher rents.

As Mulhall told me, some observers are saying that this gap in supply can be met by the serviced office/co-working sector, but he doubts the true level of demand.

While this model fulfils the demand for start-ups and short-term space, he believes it does not suit the core SME market.

"Most of these businesses are well established brands who want the kudos of their own name over the door," Mulhall said.

He questions "whether there is genuinely a market in Dublin for large-scale serviced office/co-working, to the extent that operators can justify occupying their current amount of leased buildings in the long term".

As a tenant rep specialist, Mulhall accepts he may be biased, but he says that SMEs are very frustrated by the "headline rent" jargon used among office agents.

"No one is paying €65 per sq ft, which is touted as the 'headline rent' in the CBD. Agents need to get real on rents. Most SMEs will be happy to pay rents up to €50 per sq ft for the best space in the CBD - after that they will look at the suburbs and lower-grade space," he said.

Mulhall concluded: "The problem isn't anyone's fault - it's a consequence of this unusual tech-occupier cycle, and their yearning to lease entire buildings."

It's refreshing to hear an alternative view from an agent and I suspect that James Mulhall's words will ring true for a lot of frustrated office occupiers.

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