Saturday 25 November 2017

Where will the office boom end? Few agents see market peaking yet

The map shows where major office construction is taking place in Dublin today
The map shows where major office construction is taking place in Dublin today

Donal Buckley

Prime Dublin office rents could increase strongly to new record levels during each of the next three years due to the combination of continued economic growth and the time lag of new supply coming to the market.

This is the view of a number of estate agents. Knight Frank Ireland (KFI) says that while more than five million sq ft of Grade A office space is due to come on stream in Dublin between this year and 2018, this may not be sufficient to meet demand over that period.

Marie Hunt of CBRE estimates that the take-up of Dublin offices may again exceed 2 million sq ft for the third year in a row although it may drop below last year's levels and vacancy could level off at around 10pc.

Nevertheless she believes that prime Dublin office rents could reach €65 per sq ft by the end of this year - up from €55 per sq ft at the end of 2015.

Both Declan O'Reilly of Knight Frank and John McCartney of Savills say current rents are even higher rents at €57.50 per sq ft and MCartney says they could reach €65.50 per sq ft for by the end of this year and €73 per sq ft for 2017.

James Nugent of Lisney says that some occupiers "may be forced to pay up to €70 per sq ft" as early as this year.

O'Reilly says that including new developments, redevelopments and refurbishments, there is approximately 5.04 million square feet in the pipeline. However he estimates a demand for over 6 million square feet during the period.

"Our forecast of the office market has illustrated that fears regarding market oversupply have little basis in reality with the projections showing that the current development pipeline is insufficient to cater for existing and future demand," he adds.

"The projections suggest that we are facing an annual deficit of 325,000 sq ft between 2016 and 2018, or a total of 975,000 sq ft cumulatively over the period. Furthermore, the estimate is likely to understate the true deficit as it does not factor in the significant pent-up demand that was likely to have been created in 2015 due to the combined forces of high employment growth, a prevailing low vacancy rate and lack of new space delivered to the market during the year," Mr O'Reilly says.

As much as 2.67 million sq ft of built space was let in 2015, the highest level since 2007.

"With 31.6 pc of the upcoming supply already let, this implies that approximately 1.15 million sq ft of the new construction that comes on stream will become available to rent annually. This is just over half the ten-year gross take-up average of 2 million sq ft per annum," he adds.

The 5 million figure includes owner occupier buildings such as the Central Bank building on the North Lotts and the Microsoft development in Leopardstown. It also includes pre-lets such as Aer Cap's leasing of Denis O'Brien's LXV on the corner of St. Stephens Green and Bank of Ireland's taking of Baggot Plaza.

Knight Frank bases its demand forecast on the expectation that as many as 12,500 jobs a year could be created in the Dublin office sector. This in turn is based on 56,000 jobs having been created nationally in the 12 months to September 2015 and Economic and Social Research Institute forecasts of a further 48,000 for 2016.

John Ring, investment analyst with KFI estimates that 50,000 jobs a year will be created nationally between 2016 and 2018 and half of these will be located in Dublin. This is based on CSO figures showing that 53 per cent of jobs in 2014 were created in Dublin.

"According to the 'Recovery Scenario' contained in the 'Occupational Employment Projections 2020' published by the government agency 'Solas' in 2014, half of new jobs will be in the white collar sector," Ring says.

Based on those assumptions and allowing 130 per sq ft for each employee he estimates an annual requirement for 1.625 million square feet of offices.

Technology, media and telecommunications (TMT) continues to account for the largest market share by sector, comprising of 46pc of the office take-up in 2015, the same share as 2014. Finance's share rose from 14pc, to 17pc but professional services declined from 11pc to 8pc.

Dublin letting activity grew again in 2015 with 2.67 million sq ft let compared to 2.39 million sq ft in 2014 making it the best year since 2007.

Knight Frank has produced a map showing the locations of 27 upcoming speculative office schemes in the area stretching from Ballsbridge to north docklands. But this is less than half the number that appear to be in Dublin's development pipeline. Marie Hunt of CBRE says that there are as many as 66 office schemes in the pipeline.

John McCartney argues that "if the economy continues growing as per the available forecasts demand will remain strong. "Remember these (rental) figures are nominal and make no adjustment for inflation. Consider also that economic output is almost 10pc higher than 2007."

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