Saturday 15 December 2018

Dublin office rents to rise as supply tightens in 2018

An artist’s impression of Kennedy Wilson’s Capital Dock development where Indeed will take 216,000 sq ft across two blocks
An artist’s impression of Kennedy Wilson’s Capital Dock development where Indeed will take 216,000 sq ft across two blocks
Ronald Quinlan

Ronald Quinlan

After a year in which Dublin's office market recorded its highest-ever level of activity with 3.6 million sq ft of space being let, the consensus from the country's leading commercial real estate agents is that 2018 will see higher rents as supply tightens in the face of intense competition among potential occupiers.

While Knight Frank believes that developers with the capacity and funding to commence construction in the capital will take advantage of the opportunity to secure early pre-lets, the quantum of development is unlikely to be sufficient to depress rent levels in Dublin's Central Business District (CBD) or its immediate environs as major international employers in the technology sector continue to dominate the city's office market.

Offering its prediction for the coming year, Lisney says in its 'Lisney 2018' report that US tech giants Facebook and Google are, between them, on track to occupy 4pc of all commercial office space in Dublin's city centre in 2018, with their total space amounting to 38,500 sq m (414,410 sq ft) and 74,600 sq m (802,987 sq ft) respectively.

Quite apart from the demands being placed on office space by the technology sector, Knight Frank's director of office agency, Declan O'Reilly expects further interest to come from US companies seeking to relocate their European operations from London to Dublin as a result of Brexit.

Mr O'Reilly said Knight Frank also anticipates there will be an increase in the number and size of deals that will be done as a direct result of Brexit, in the financial and professional services sectors.

With competition between prospective tech and financial services occupiers expected to intensify over the course of 2018, Lisney notes in its report that vacancy rates, which are considered to be a key benchmark of the health of the commercial property sector, are now running at a headline rate of 8.7pc in Dublin (6.9pc in the city centre).

Those vacancy rates - the lowest recorded since the year 2000 - are unlikely to increase in the short term though, with Lisney reporting that 2018 will see the delivery of 189,000 sq m (2.03 million sq ft) of new office stock in the capital. Just 32,000 sq m (344,445 sq ft) of this will be available to let in the city centre; however, 68pc of the 152,000 sq m (1.63 million sq ft) due for delivery there has already been pre-let or reserved.

Looking further ahead to 2019, Lisney highlights what it describes as the "urgent need for construction of commercial office space to ramp up significantly in order to keep pace with predicted demand".

Referring to the current projection for 26,800 sq m (288,472 sq ft) to be completed in Dublin city centre, Lisney notes that the total city centre completion estimate amounts to less than the space Facebook currently occupies in the market.

Commenting on the situation, James Nugent, chairman and head of offices at Lisney said: "With almost all new office space fully let by the time it is completed, competition remains intense. There is evidence of blue-chip international companies winning out over indigenous Irish companies. In reality indigenous businesses are struggling to match the rent-paying ability of overseas occupiers."

That rent-paying ability saw headline rents in Dublin city centre reach €700 per square metre at the end of 2017, according to CBRE's 2018 Outlook annual report.

While CBRE believes the coming year may see some exceptions where small suite or superior buildings achieve premium rental values, they see the best prospects for rental growth in the office sector coming in buildings in secondary and provincial locations. An increasing proportion of Dublin leasing activity is likely to occur in the suburbs of the city as occupiers move some functions of their business to more cost-effective locations, CBRE says.

In another development for the Dublin office market, CBRE expects to see increased demand for flexible office accommodation following the decision of the world's leading provider of flexible workspace, WeWork, to sign its first leases in the Dublin market in 2017.

All told, nearly 5pc of office take-up last year was accounted for by flexible and co-working tenants.

But while 2018 is set to be another strong year in terms of transactional activity in the Dublin office market, it will struggle to come close to the performance recorded last year.

According to Knight Frank's analysis, 2017's record-breaking 3.6 million sq ft in lettings marked the fifth consecutive year in which the market had expanded.

While robust levels of letting activity were observed throughout the year, the final quarter witnessed an average deal size of 23,852 sq ft - well over double the norm for a typical quarter - as a number of large deals transacted.

Knight Frank's head of research John Ring attributes the increase in large deals to the unlocking of pent-up demand as new office buildings are supplied to the market.

The demand, Mr Ring says, is being driven primarily by the TMT (Technology, Media and Telecommunications) sector, which accounted for 51pc of take-up with Microsoft's occupation of its new, 300,000 sq ft campus in Leopardstown and Indeed's taking of 216,000 sq ft at the soon-to-be completed Capital Dock the largest of these. LinkedIn, Facebook and Google also substantially increased their footprint in 2017.

While the TMT sector was the standout performer, there was an increase in activity across the market, with the finance and state sectors also performing particularly well.

Finance accounted for 20pc of the market in 2017, led by AIB who let 273,000 sq ft across two locations within the Green Reit portfolio - 10 Molesworth Street and Block H at Central Park in Leopardstown.

The State accounted for 10pc of the market, the largest being the OPW's letting of 143,000 sq ft at Block 1 Miesian Plaza.

Activity continued to be focussed in the city centre which accounted for 62pc of take-up, followed by the south suburbs with 19pc and the city fringe with 12pc.

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