With no Brexit boost, is Dublin office boom over?
Flat rents and a 10pc supply increase could spell trouble ahead for the Dublin office market
With 380,000 square metres of new space under construction and rents flat, has the Dublin office market peaked? Anyone who invested in Dublin office property after the crash made a bundle, with average rents more than doubling from €296 per square metre in 2011 to €673 per metre by the first quarter of 2017.
This explosion in office rents fed through into capital values with Green REIT, most of whose portfolio consists of Dublin offices, marking up the value of its assets by 14pc in the year to June 2014, almost 24pc in 2015 and by a further 14pc in 2016, a cumulative increase of 61pc in just three years.
It was a similar story at the other REIT, Hibernia, where the value of its assets, mainly Dublin offices, rose by a cumulative 52pc in the three years to March 2017.
But is the great Dublin office boom drawing to a close?
"We built nothing for five whole years from 2011 but the FDI kept flowing in," says Marie Hunt, head of research at estate agents CBRE.
Hunt estimates that approximately one million square feet of new Dublin office space was taken up by tenants between 2011 and 2015. With virtually no new supply, vacancy rates plummeted, from over 20pc at the start of 2011 to just 6.5pc by mid-2017.
She points out that, while Dublin office rents have risen strongly since 2011, this was merely a reversal of the sharp post-crash falls when rents fell by more than 55pc. At the current average of €673 per square metre, Dublin office rents are back exactly where they were a decade ago.
After building virtually nothing for five years, property developers are now working overtime on new offices. Hunt estimates that there is 380,000 square metres of new office space being built in Dublin, the equivalent of more than 10pc of the existing floorspace.
A recent report by estate agents Cushman & Wakefield calculated that there was 3.43m square metres of office floorspace in Dublin at the end of June - when it comes to offices Dublin is essentially Ireland with the combined office floorspace in the next three biggest cities, Cork, Limerick and Galway, being just 1.21m square metres or only fractionally over a third of the Dublin figure.
Will there be a market for all of the new offices being built in Dublin or will such a huge increase in supply over a short space of time flood the market and hit rents and capital values?
So far the signs are reasonably positive. A massive 101,000 square metres of office floorspace was taken up by tenants in the second quarter of this year, with a total of 151,000 square metres being taken up in the first six months of 2017. If tenants keep renting new floorspace at anything like first-half levels then the market should be able to absorb the increase in supply relatively easily.
Also helping matters is that a large proportion of the new floorspace under construction has been pre-let with Hunt estimating that 30pc of the new offices already have tenants lined up while Cushman & Wakefield puts it at 27pc.
With the exception of the two REITs, who raised almost €1bn between them from selling shares to investors, most other Irish property investors are still strapped for cash. As the banks are still reluctant to lend against speculative office developments, their only hope of borrowing to fund a project is to have all or most of it pre-let.
Not alone is a large proportion of the new floorspace already pre-let, most of it seems to be going to companies who are already located in Ireland either expanding or moving rather than to new entrants.
Hunt estimates that all of the new space taken up in the first quarter and 90pc of the space taken up in the second quarter went to existing companies rather than to new entrants.
This would seem to indicate that hopes of an influx of London-based banks fleeing Brexit have been overdone.
"Brexit is not a primary driver but it is adding an additional layer of demand," says Hunt. In practice, much of the increase in demand for office floorspace triggered by Brexit is coming from firms who already have Irish operations moving more of their activities to Dublin rather than new arrivals.
While the financial services sector has certainly contributed to the recovery in the Dublin office market, it is not the main driver. By far the largest contributor has been the tech sector, which accounted for 40pc of the new floorspace taken up in the first half compared to 21pc from financial services, 14pc from the public sector and 11pc from business services. Hunt also points out that the new floorspace won't hit the market at the same time. She reckons that 156,000 square metres of new floorspace will come on stream this year, followed by a further 177,000 square metres in 2018 and 213,000 square metres (on which construction work has only begun on about 85,000 square metres) in 2019.
"Development has been very controlled in this cycle. It has been very much a case of 'if you come we will build it'. This means that we will not be ending up with empty buildings this time."
Disciplined development, a large proportion of the new floorspace pre-let, strong demand from companies already located in Ireland, what could possibly go wrong?
After rising strongly since 2011 there is now growing evidence that office rents have peaked with average rents flat in the second quarter. With average Dublin office rents much higher than those in Frankfurt (€474 per square metre), Amsterdam (€365) or Brussels (€300), cities with which it is in competition for projects fleeing Brexit, this may be no bad thing.
"If rents had kept on rising it would have become very difficult for Dublin to compete", says Hunt.
Another straw in the wind was the publication of GeoDirectory's report on commercial property vacancy rates last week. What this showed is that, while vacancy rates for the prime office space preferred by the Googles and Microsofts of this world are at close to historic lows, it is a very different story for the lower-quality office space that smaller, indigenous firms must rely upon.
According to GeoDirectory, 13.5pc of commercial addresses in the country are vacant with 13.6pc of Dublin commercial premises unoccupied. The vacancy rate is much higher in Dublin 2, the traditional business district, at 18.3pc.
"Dublin 2 and Dublin 4 are now associated with tech companies such as Facebook, Twitter and LinkedIn. They want large buildings where they can house their full teams. That puts a high demand on those sort of buildings," says GeoDirectory chief executive Dara Keogh. "The smaller above-the-shop space is not being fully utilised."
Like many other sectors of the Irish economy, the Dublin office market is a two-tier structure. There is a thriving top tier of high-quality office space in purpose-built buildings largely let to the multinationals and the companies that service them and a struggling bottom tier of poorer-quality, often converted, space mainly occupied - when it is occupied at all - by much smaller, Irish-owned companies.
Sunday Indo Business