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Falling office prices drag down commercial rents

Falling office property rents have dragged down the overall commercial property rents for the first time since 2002.

According to the Lisney composite rental index, Dublin office rents fell 2.7pc in Q1 2008, when Dublin city centre rents saw the fastest falls -- 3.1pc -- as this area has seen new office construction at its strongest.

On the other hand, retail and industrial rents remain flat as no category of commercial property showed any rental growth in Q1.

Consequently, the overall combined index recorded a 1pc fall. This is the first time that overall commercial property rents have declined since 2002.

Lisney economist, Dr John McCartney, pointed to a combination of very strong office construction and softening demand for business space.

"360,000sqm of new office space has been built in Dublin since January 2007. This is equivalent to 12pc of the total Dublin office stock, and is a huge amount of accommodation to come on-stream in just 15 months -- 73pc of this new office space is located in the city centre."

While the market was quickly able to digest new space when the economy was growing, occupier demand is now beginning to soften due to the economic slowdown, and rents are easing back as a result.

"Office take-up remained robust by historical standards in Q1, but was down by one third on 2007 levels. This is not surprising given that the financial services sector, which accounted for 45pc of all office lettings in 2007, is going through a sharp global slowdown," Dr McCartney adds.

He believes that 2008 is shaping up to be an all-time record year for office completions. With the likelihood that demand will moderate and office rents could slip further.

Retail rents were flat in Q1, but significant increases in the second half of 2007 mean on an annual basis the overall retail rents index is up 8.75pc on Q1 2007. This reflects substantial increases in Grafton Street during the third quarter of last year, which included a new letting to Tommy Hilfiger at a price believed to be in excess of €11,000 per sqm..

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Although retail park accommodation is plentiful across the country, the availability of prime bulky goods space remains quite tight in Dublin. This drove Dublin rents up by around 5pc in Q4 of last year. The suburban shopping centres in Dublin achieved modest rental growth towards the end of 2007, but were unchanged in Q1 of this year.

A quarter-by-quarter analysis shows no rental growth in any category of retail property in the first three months of this year. Consequently Dr McCartney believes that retail rents are likely to prove sluggish during this year due to strong development activity and moderating occupier demand.

Industrial rents have also been flat in Q1 2008. However, higher interest rates and a desire to remain flexible in an uncertain economy mean that more firms are now choosing to rent rather than go down the traditional route of buying their industrial premises. Consequently, Lisney believes these factors could provide some support for industrial rents over the coming months.

IN contrast, Jones Lang La Salle reports no change in prime Dublin office rents over the quarter or over the year and puts them at the fifth highest in Europe, at €646 per sqm per annum, coming after London's West End, Moscow, London City and Paris.

Deirdre Costello, office agency director with Jones Lang LaSalle in Dublin, comments: "The rate of Dublin rental growth is slowing in the light of a more difficult economic climate, which will filter through to occupational demand. There is, however, still reasonably strong activity in the office leasing sector, with companies like Bank of Ireland all looking for accommodation. Prime rental levels had, in exceptional circumstances, reached and exceeded €60 per sqft for prime office accommodation in late 2007, and we do not forecast any additional growth beyond that level."

Roland O'Connell of Savills Hamilton Osborne King says that office take-up has been reasonably buoyant. "Between deals agreed late last year and those in early 2008 there is over 1 million sq.ft. of office space at contract stage at the moment. In addition there are a number of large tenants including CITCO, Deloitte & Touche, KPMG and Arthur Cox actively looking for space which in total will amount to a further 700,000 sq ft or so.

"Demand remains buoyant in the largest size category. The length of time taken to get from agreement of the deal to signing contracts has increased hugely which can be frustrating. Furthermore tenants in the medium to small category are being cautious but demand is still reasonably buoyant," he adds.