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MarketView: Dublin office market in Q1 2010

Overall Commentary

Activity improved in the Dublin office market in the first three months of 2010, with 24,954m2 of lettings signed in the capital in Q1. This represents a quarterly increase in letting activity in the capital of 26% and a year-on-year increase of 143% compared to Q1 2009, when the Dublin office market experienced the lowest quarterly take-up on record. There were 36 individual office lettings signed in Dublin during Q1 2010, nearly half of which (17 lettings) were larger than 450m2 in size. Three office lettings signed in Q1 2010 were 1,900m2 or larger. This is in contrast to the same period last year, when 31 lettings accounted for only 10,284m2 of office take-up between them.Prime office headline quoting rents in Dublin held steady in the first quarter of 2010 at ?376 per square metre. With rents having declined approximately 44% from peak and Ireland’s corporate tax rate still attractive to international occupiers, demand – as measured by the total requirements for office accommodation in the capital – has grown considerably since the start of 2009, when we saw not only the lowest level of office letting activity in the capital but the most significant contraction in the Irish economy overall. There has been a notable increase in demand in the last few months with a number of new office requirements emerging. This comes at a time when the quantum of new office supply entering the Dublin market is severely restrained, with only what is currently under construction due to come available over the next 18 months and no new schemes scheduled for completion in 2012.

The level of vacancy in the capital fell in Q1 2010 for the first time since 2008. Overall vacancy in Dublin fell 45 basis points to 23% in Q1, although there were minor increases in vacancy in some districts. Several trends are at play. The make-up of the vacant office stock in Dublin continues to shift as occupiers exercise break options and move from older, sometimes obsolete, offices into new “Grade A” accommodation. As they move, the quality of vacant accommodation continues to deteriorate and there is limited ‘net absorption’. However, some occupiers are net takers of space and are helping to slowly erode vacancy. For example, 10 of the office lettings signed in Dublin during Q1 2010, accounting for 10,633 square metres of overall takeup between them, were new entrants into the Dublin office market. A considerable amount of stock under construction around the city is already pre-let and won’t ultimately end up in vacancy calculations. In addition, the lack of new speculative accommodation coming on stream should help to slowly erode the level of vacancy in the market. However, the stock of new office accommodation will decline first meaning that any upward movement in rental values will be limited to this sector while rents for older accommodation in need of refurbishment are likely to continue to come under pressure.

Continued stability in office yields has attracted increased investor interest in office assets in recent months. However, as yet, this has not translated into completed transactions. Almost ?19.5 million of investment transactions were signed in Ireland during Q1 2010 although none of these transactions comprised office investments.

Although take-up in the Dublin office sector during the first three months of 2010 was less than the average for Q1 over the last number of years, it was considerably better than that achieved in the same period last year. There were 36 lettings completed in the quarter and there are a number of large requirements now emerging which is very encouraging. In terms of the number of lettings signed (24) and the quantum of office accommodation leased (13,244m2), the city centre region accounted for the majority (53%) of take-up activity in Dublin during Q1 2010. It is important to point out that the majority of lettings signed in the capital during the first three months of the year were 465m2 or smaller in size. Indeed, these smaller lettings accounted for aggregate take-up of 4,173m2. There were no lettings larger than 4,645m2 signed in Dublin during Q1. However, there has been a notable improvement in demand in recent months with a number of large requirements being activated which will translate into letting activity over the course of the next 12 months. Overall outstanding requirements increased significantly in Q1 2010 to more than 110,000m2. A third of these requirements are for 4,645m2 or larger and a further 25% of these requirements are for office accommodation ranging between 1,858m2 and 4,645m2. Demand remains focussed on the city centre, with 73% of outstanding requirements focussed on securing premises in this district. The overall vacancy rate for Dublin fell slightly in Q1 2010, but still remains high relative to many other European markets at 23%. Our research indicates that total vacant stock in the city fell by just over 12,000m2 to 809,000m2 at the end of the first quarter. Underlying this falling vacant stock is a fall in Grade A stock of 10,675m2, while second-hand vacant stock has increased by 6,100m2. There is a continued shift in the make-up of vacant stock in Dublin towards second-hand accommodation, as occupiers exercise break options and move operations into newer accommodation to avail of current deals. It remains to be seen if the decline in the overall vacancy rate experienced in the last three months is indicative of a trend. Although there is very little new office accommodation due to come on stream for the foreseeable future, without continued inward investment, absorption of vacant accommodation will be slow. The only new supply that came on stream in Dublin in the first three months of 2010 was located in the west suburbs, where 10,500m2 of new office buildings completed. There remains 80,000m2 of office development under construction and scheduled for completion in 2010, with a further 32,000m2 under construction and scheduled for completion in 2011 and no new office schemes in the pipeline for 2012. Lettings to hi-tech and computer services tenants accounted for the largest single proportion of take-up in Dublin during Q1 2010, accounting for 8,715m2or almost 35% of lettings signed in the period. The manufacturing & industrial sector, which has not been highly active in the office market in recent quarters, accounted for 22% of take-up in Dublin during Q1, while business services tenants accounted for 28% of letting activity. The remaining tenant categories – financial services, professional services, public sector and consumer services – all accounted for only 15% of take-up between then in the last three months. There are a number of office properties currently reserved, which bodes well for take-up later this year. Much of the activity is coming from occupiers who are taking advantage of the value in the market at present and a large proportion of demand is emanating from the IT and pharmaceutical sectors. There are a number of outstanding requirements for new office accommodation in Dublin from companies such as The Central Bank, ESB, Yahoo and LinkedIn, which is encouraging. Bord Gais has agreed to lease over 5,000m2 in a new office building at One Warrington Place in Dublin 2.

CITY CENTRE MARKET

The city centre remains the preferred location for office occupiers in the Dublin market as was again evidenced in Q1 2010. The city centre accounted for 53% of overall office take-up in Dublin during Q1, with 13,224m2 of lettings signed in the city during this period. This translates into an increase in letting activity in the city centre of 3% on a quarterly basis and a 127% increase on the letting activity seen in the city centre during the same period last year (albeit from a much lower base). Dublin 2/4 accounted for not only the largest number of transactions, but the lion’s share of city centre take-up during Q1. More than 70% of the city centre take-up recorded in Q1 occurred in Dublin 2/4, with 19 out of the 24 city centre lettings signed during the period being in this sub-market. One of the largest lettings signed in Q1 occurred in the Dublin 2/4 district at 1,957m2 The rest of the lettings in Dublin 2/4 were smaller than 929m2 in size. Vacancy in Dublin city centre held steady in Q1 2010 at 23%, on par with the overall vacancy rate in the capital. Dublin 2/4, however, saw a slight increase in its vacancy rate to 17.3% in Q1 2010. The majority of the vacant stock in Dublin city centre remains high quality, with Grade A vacant stock accounting for 68% of the vacant stock in the city centre. There remains a unique problem for the city centre in this regard: demand for office accommodation remains focussed on the city centre, particularly Dublin 2/4. However, there are only four or five sites that could accommodate a largescale international occupier looking to locate in the city centre. Much of the vacant stock in Dublin 2/4 comprises floors in various buildings. Indeed, the largest proportion (58%) of vacant office stock in the city centre at present comprises accommodation that extends to less than 465m2 in size. Our research indicates that there is more than 58,000m2 of office stock under construction and scheduled for completion in the city centre before the end of the year. Of this stock
under construction, 48,000m2 of it is located in Dublin 2/4. Importantly, 57% of the office development under construction in the city centre at present is already pre-let, meaning the net supply forecast to enter the market vacant in 2010 at this time is only 24,700m2. Prime headline quoting rents in the city centre remained stable in Q1 2010 at ?376 per square metre.