Commercial rents trending upwards in short term, report says

A new report on the five-year outlook for prime rents and yields across all sectors of the Irish commercial property market predicts that rental values will trend upwards and yield compression in the short term.

The analysis, by Cushman & Wakefield, is based on a “rigorous econometric model and qualitative analysis”, which assesses demand for commercial property as “strong” from both occupiers and investors.

In terms of the prime Dublin office market, the report points to rents rising by 4.6 per cent in 2017 (similar to 2016) to reach €646/sq m by year’s end. This is up from €619/sq m at the end of 2016.

With a large volume of office space under construction, however, the agent predicts rents will stabilise over the medium term. “No more than 9 per cent growth in prime rents is forecast through to 2021,” according to the report.

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In terms of the Cork, Limerick and Galway prime office markets, Cushman & Wakefield sees strong rental growth out to 2021. Limerick rents are predicted to grow by 11 per cent per annum, with grade-A, spec-built office space topping out at €300/sq m. Cork rents, meanwhile, will hit €350/sq m by 2021, while Galway's "critical supply shortage" is predicted to push prime office rents along at an annual growth rate of 7 per cent.

The analysis reports that prime Dublin office yields remained unchanged in 2016, at 4.25 per cent. This is expected to fall to 4 per cent over the next three years and then revert back to about 4.25 per cent by 2021, with “increase in supply” the key driver of movement in this variable. Little movement in office yields is also predicted out to 2021 in the Cork, Limerick and Galway markets.

Zone A rents

In terms of retail, the agent is predicting year-end Zone A rents on Dublin's Grafton Street to reach €7,000/sq m and increase at an average annual growth rate of 4 per cent out to 2021. However, it's worth pointing out that at the end of 2016, these values were still 42 per cent off their 2008 peak.

On Henry Street, rents are set to rise to €5,043/sq m by the end of 2017 and increase at a 4 per cent annual clip to reach €5,584/sq m in 2021. However, rents on Henry Street are still 33 per cent below their 2008 peak.

Corresponding prime yields for Dublin retail fell to 3.75 per cent in 2016 and are predicted to reach 3.25 per cent by the end of 2017. Cushman & Wakefield predicts retail yields to remain at this level through 2018 and 2019, and rise thereafter to 3.50-3.75 per cent.

Meanwhile, prime retail rents in Cork and Galway stand at about €2,250/sq m and should increase by 4 per cent per year out to 2021. Corresponding yields stand at 6 per cent in both locations and could dip slightly over the next three years. Limerick retail rents are predicted to increase at an annual rate of 5 per cent to 2021, with yields stable at 6.5 per cent.

Industrial units

Cushman & Wakefield says industrial units have the “strongest short-term rental growth forecasts of all sectors”, as well as the “highest total returns”.

Prime Dublin industrial rents rose 8 per cent in 2016 to reach €81/sq m by year’s end. Driven by rising demand and limited speculative development, the agent predicts these rents will rise to €88/sq m in 2017 and €100/sq m by 2021, while yields will drop from 5.5 to 5 per cent by 2019.

In the regional centres, prime industrial rents reached €70/sq m in Cork and €75/sq m in Galway during 2016.

“Galway has seen the strongest rental growth over the last five years, and further upward rental value pressure is expected to continue,” according to the report. “Driven by a shortage of industrial stock, both Cork and Galway look set to reach rental levels of €85 per sq m by 2021.

“The Limerick industrial market lags behind, and stood at €48 per sq m per annum in 2016. However, Limerick has the strongest short-term rents forecast of the regional centres, with an average annual growth rate of 4.6 per cent for the coming five-year period, rising to €54 per sq m in 2020 and reaching €60 by 2021.”