Office rents slump as vacancy rate rises rapidly

IT HAS BEEN a grim year for the office sector. Latest figures show vacancy rates in the city centre have more than tripled while rental values have slumped to levels last recorded a decade ago. Yet despite the pervading gloom, the industry is grasping onto the first shoots of what is expected to be a very slow recovery.

Property agents point out that transactions have ticked up over the past three months and hope this indicates the market is bottoming out.

But landlords are now bending over backwards to get tenants through the door. It is understood the Irish fund services division of US investment bank, Morgan Stanley, recently signed a deal to take over the top floor of the Observatory building in Dublin’s docklands, after clinching a sizeable reduction on the market rent of around €430.5 per sq m (€40 per sq ft).

It is also understood that developer Bernard McNamara owns a significant stake in the six-storey office block at Sir John Rogerson’s Quay, alongside the property investment firm, Quinlan Private.

Agent HT Meagher O’Reilly acted for the landlords while Jones Lang LaSalle acted on behalf of the tenant. Both firms declined to comment on the transaction, citing commercial confidentiality.

Morgan Stanley Fund Services, which is currently based at Hambleden House at Pembroke Street in Dublin 2, opted for a short-term lease of 10 years and has agreed a 45 per cent rental increase at the five-year review.

According to industry sources such “soft deals” have become a feature of the market as developers scramble to fill vacant office schemes constructed at the height of the economic boom.

Like numerous other empty office blocks dotted around the capital, The Observatory building was constructed when vacancy rates in the city centre were hovering around 5 per cent and take-up levels were close to 160,000sq m (1.722 million sq ft). To put that in perspective, Lisney calculates that take-up this year will be half that figure, while agent HT Meagher O’Reilly put it at between 65,032 and 69,677sq m (700,000 and 750,000sq ft).

The Observatory building’s history serves as an emblem of this dramatic market turnaround. In late 2006, the financial information services firm, Bloomberg, agreed to pay €646 per sq m (€60 per sq ft) for the top floor but was muscled out of the race when Depfa Bank, which is based at the IFSC, offered to rent the entire property at over €538 per sq m (€50 per sq ft).

The bank’s relocation plan was swiftly shelved with the outbreak of the global financial crisis and resulted in the completed building standing vacant for two years.

Other high-profile vacant schemes in the city centre include developer Sean Dunne’s Blood Stone building, Warrington Place, Hanover Quay, and Treasury Holding’s 15-storey Montevetro tower at Grand Canal Dock, which will be completed next year.

However, Lisney’s James Nugent argues the vacancy rates, which his firm puts at 17 per cent in the city centre and 22 per cent elsewhere in the capital, are being “distorted” by properties that are “essentially unlettable”.

He says tenants have “zero appetite” for “older properties that are fundamentally obsolete” and claims they should be removed from the market and redeveloped.

According to Roland O’Connell of Savills, poorly located speculative schemes are also adding to the high vacancy level, which his agency lists at over 30 per cent in suburban and secondary locations, and he argues that some of these properties may have to be fitted out for alternative uses.

But O’Connell is sanguine about the future, arguing the handful of IDA-backed technology firms basing their headquarters in Dublin has returned a degree of confidence to the market though he predicts that strong growth will not recover until the problems in the financial services sector have been resolved. Amazon, Facebook, ServiceSource and Dun Bradstreet, which recently agreed to take up to 7,432sq m (80,000sq ft) at The Chase in Sandyford, are the four international technology companies that have provided the largest deals of the year. And it is anticipated the social networking giant LinkedIn may follow next year as a newspaper report revealed the internet behemoth recently registered two Dublin companies.