A year of recovery in rents

This was the year the recovery began in prime Dublin office rents and capital values, according to estate agents. A dearth of fresh construction, combined with heavy demand for prime floor space from multinationals, sparked the office market into life.

Activity levels picked up as the year wore on, with notable deals in the first quarter including 2,300sq m of space taken by Investec in the Harcourt Building in Dublin 2, and technology outfit Salesforce renting 4,600sq m at Central Park in south Dublin. The news that Larry Goodman had agreed to pay €43 million for the old Bank of Ireland building on Baggot Street also gave a fillip to the office investment market at the beginning of the year.

As the months wore on the flow of noteworthy deals gathered momentum. Airtricity took 7,700sq m in South County Business Park; Fidelity leased 5,300sq m in Citywest; Novartis, a Swiss drug company, agreed to take 7,900sq m at Elm Park, Dublin 4; Deutsche Bank took more than 10,000sq m in Easpoint; while Facebook and William Fry both agreed large deals for the Grand Canal area in the Docklands.

By the summer IDA Ireland was warning that while there is no shortage of office space currently, there will be within two years unless developers start planning new projects now. The planning and construction phases for a large new commercial project usually take between 24 and 36 months.

"There is probably another year's supply of stock. In 2015, that's when we will see the real shortage," said Willie Dowling, the director of CBRE's office division.

Roland O’Connell, director of the offices department at Savills, estimates that there will still be “some decent quality large buildings on the market” next year. “But there will be none by the end of next year. At the end of 2014 to the middle of 2015 we could see a rental spike for the best space.”

On the investment side, international buyers such as Northwood Investors and Kennedy Wilson, spurred on by rental growth, drove competition for the best assets in the market. CBRE estimates that of the estimated €1.5 billion of Irish commercial property transactions this year, about 30 per cent relates to office complexes, in addition to the office components of mixed-use schemes.

The increased levels of activity and competition for space had an inevitable inflationary impact on rents and, latterly, capital values. Yields compressed rapidly throughout the year.

In the first quarter, according to figures from CBRE, prime city centre office rents rose for the first time in six years to about €307 per sq m, or €28.50 per sq ft. CBRE expects that to have risen to about €377 per sq m by the end of the year, with another rise of up to 15 per cent projected for next year.

O’Connell estimates that yields have reduced by “at least a full percentage point” during the year. Other estimates put the compression at closer to 1.5 percentage points, with prime office yields now at about 6 per cent. Office values started rising in the spring. Lisney, in its third quarter office review, estimated that capital values over the three months had risen by 1.7 per cent.

Vacancy rates in Dublin now stand at about 18 per cent. Outside of the capital there were also signs of life later in the year in the Cork and Galway markets. Vacancy rates in Galway are the lowest in the country. Large employers tended to favour suburban locations in these cities, according to agents.

"Notable deals outside Dublin include Hewlett Packard doing a pre-lease earlier in the year on 85,000sq ft of space in Ballybrit, Galway. There was no other suitable stock available in the city," said Dowling.

In Cork, Abtran, which won the contract to provide the customer contact centre for Irish Water, took 5,600sq m in the Mahon area on the outskirts.

There appears to be a consensus that rents will soon reach sufficient levels to finance new construction. “And we desperately need new construction,” said O’Connell.

In its Real Estate Guide to Investing in Dublin report for 2013, BNP Paribas estimates that it will not be economical to build office blocks again until rents reach €430 per sq m, or €40 per sq ft.

According to CBRE, rents in some areas should reach this level next year. By the time projects start to come on-stream in 2016, rents will likely have far exceeded this level.

“There is a shortage of development finance, however, and people may now look to Nama to start providing it,” said O’Connell.

Dowling predicts that the refurbishment of older developments could become more prevalent as the market looks for stopgaps to tide it over until new schemes are built in coming years.

“The OPW has a lot of older buildings, and it is consolidating. So some of those could be refurbished. In the meantime tenants will just have to run with what is available.”