Market in deep trouble as vacancy rate up to 16%

The Dublin office market is in deep trouble despite the pick-up in inquiries over the past month.

Two new reports by agents DTZ Sherry FitzGerald and CB Richard Ellis Gunne (CBRE) agree that the vacancy rate will remain in double digit figures for the remainder of the year, suggesting that the volume of space already overhanging the market could take at least two years to clear. DTZ says that the anticipated recovery "is still frustratingly beyond reach" while CBRE is more upbeat, suggesting that the market is "now approaching the bottom of the current cycle" and we are likely to see a healthy take-up of office space in the city this year. CBRE calculates the current vacancy rate at 14 per cent while the other agency puts the figure at 16.3 per cent.

The two agencies also differ on the amount of space taken up in the first three months of this year with DTZ putting it at 27,700 sq m (298,162 sq ft) and CBRE going for 30,949 sq m (333,135 sq ft).

DTZ puts the level of unoccupied space at 391,000 sq m (4,208,724 sq ft) at the end of March. It says that this will continue to impact rental inflation during the remainder of the year, particularly in suburban locations where rents are likely to soften further.

On the positive side, the report says that construction activity has slowed significantly over the past two years with 112,300 sq m (1,208,797 sq ft) of accommodation under construction at the end of the first quarter. In addition, most of this space is located in the prime regions of the city where demand is strongest - something that should help curb excess supply levels in the suburbs. During the remainder of the year, demand for space is anticipated to improve as growth in the economy strengthens. Coupled with the slowdown in construction levels, this should help reduce the vacancy rate further towards the end of the year.

CBRE forecasts that there is a current demand for about 114,500 sq m (1,232,479 sq ft) of space in Dublin, of which 66 per cent is focused on the city centre region. A further 20 per cent is located in the south suburbs with the west and north suburbs accounting for 9 per cent and 5 per cent of demand respectively.

The agency says that the city centre continues to be the prime focus of activity with particularly strong demand for office space in the docklands area noted in recent months. Indeed, the majority of office lettings signed and reserved since the start of 2004 have been in the Barrow Street/docklands area of the city. DTZ says that professional and financial companies have become a more significant feature of demand over the past two years, a trend that is likely to continue during 2004. In the first three months of the year, both of these sectors were responsible for almost half of the space let, with the largest share of accommodation taken up, 36 per cent, occupied by the professional sector.

In addition, enquiries from the legal profession had been particularly strong during the quarter, although many of these were not likely to filter through into take-up until 2005. This included 4,500 sq m (48,438 sq ft) for Mason Hayes and Curran while McCann FitzGerald was planning to build 10,000 sq m (107,640 sq ft) on Sir John Rogersons Quay. Matheson Ormsby Prentice was also looking for 10,000 sq m (107,639 sq ft) in a prime location.

The two reports differ on current market rents for prime third generation space, possibly because of the many incentives offered to tenants. DTZ says rents have remained "relatively resilient over the past couple of years at around €455 per sq m (€42 per sq ft) and at €341 to €376 per sq m (€31 to €34 per sq ft) in secondary locations.

In contrast, the suburbs had witnessed a steady decline in rents since the beginning of 2001 reflecting the continued high level of vacant space. Rents for these regions varied from €136 to €235 per sq m (€12 to €22 per sq ft), depending on location, with those in Sandyford and Dublin 18 at the upper end of the range. In addition, landlords had resorted to offering flexible lease terms and various tenant incentives to prevent a significant reduction in rents. CBRE contends that prime rents remain steady at €480 per sq m (€45 per sq ft) and are expected to prevail at this level in the short to medium term, although they include incentives.

As 2004 progresses, the agency expects inducements and break options would become less significant, in the city centre at least, as lease terms move back in favour of landlords. "By year end we may well see some slight rental growth in the city centre market in Dublin," says the report. Wishful thinking?