Credit crunch bites for docklands offices

OFFICE MARKET:With weak demand in the first quarter of 2008, the vacancy rate for office space in Dublin's docklands has risen to 16.2 per cent

HOME TO some of the largest financial and professional services companies in the country, the IFSC/docklands has undergone significant development in recent years, rapidly transforming itself into the financial heart of the city.

Its development effectively opened up opportunities for companies to acquire large, high-spec office accommodation in a central location that was largely unavailable elsewhere.

As a result, some of the largest financial companies in the country have established a base here, including AIB, Bank of Ireland, BNP Paribas, Merrill Lynch and Ulster Bank, to name but a few.

In fact, a recent analysis of the top 100 financial companies in Ireland revealed that 43 per cent are located in the IFSC/docklands region. In addition, Anglo Irish Bank is building a new headquarters in North Wall Quay that is due for completion in 2009.

The IFSC/docklands region is also home to some of the largest legal practices in Dublin. One-third of the top 30 law firms in Dublin are located in this region, while O'Donnell Sweeney is building its new headquarters on North Wall Quay, due for completion later this year.

As an emerging hub in the central business district, the region enjoyed strong take-up activity during 2006 and 2007, accounting for close to a third of all newly-occupied space in the Dublin market during the two-year period.

The current crisis in financial markets, however, has taken its toll on occupation activity, particularly in more recent months, as occupiers become increasingly cautious. As a result, the supply of accommodation has edged upwards.

At the end of March, the total stock of office accommodation in the IFSC/docklands region stood at just over 500,000sq m (5.382 million sq ft). This is equivalent to around 31 per cent of total space in the central business district. The majority of this space, 55 per cent, was located in the south docklands area with a further 33 per cent in the IFSC. The remaining space was in the north docklands area.

Much of the space in the IFSC/docklands region is relatively modern, with 57 per cent constructed in the current decade, while a further 38 per cent was built during the 1990s. Development activity was particularly strong in the past two years, with 30 per cent of the total stock of space in the region completed in 2006 and 2007.

The majority of this new space is at Sir John Rogerson's Quay and Spencer Dock, including Riverside One, Whitaker Square and the new PriceWaterhouseCoopers headquarters building.

Take-up was particularly robust in the IFSC/docklands region in recent years, reflecting the strength of the economy and the overall office market. In 2007, the quantity of newly-occupied space in the region totalled around 87,300sq m (939,688sq ft). This is equivalent to 30 per cent of the total quantity of space taken up in the Dublin market, similar to the proportion recorded for 2006.

The majority of this space, 64 per cent, was occupied by companies in the professional sector, largely reflecting the movement of PriceWaterhouseCoopers and Matheson Ormsby Prentice to their new premises during quarter two. A further 21 per cent of space was taken up by financial companies.

The impact of the credit crunch was felt in the opening months of 2008 with take-up in the IFSC/docklands region moderating to 7,900sq m (85,035sq ft) during quarter one. This equated to only 11 per cent of total office take-up in the Dublin market. The financial sector was responsible for the majority of this activity, 61 per cent, with a further 21 per cent taken up by the State.

Despite the strength of demand during 2006 and 2007, supply levels in the IFSC/docklands region remain quite robust, with the quantity of available space standing at 82,100sq m (883,716sq ft) at the end of March. This equates to a vacancy rate of 16.2 per cent.

This figure must, however, be taken within the context of the wider central business district, where space, particularly large space, is very limited. Overall the vacancy rate in the central business district is just over 8 per cent - a figure marginally above equilibrium. Furthermore, over a quarter of this available space was under active negotiation at the end of March. Interestingly, around 26 per cent of all available space consisted of only two buildings, namely Block R at Spencer Dock and the Watermarque Building on South Lotts Road.

Development activity in the IFSC/docklands region remains strong with 82,300sq m (885,869sq ft) of space under construction at the end of March. Around 35 per cent of this space is in the IFSC, comprising new headquarters buildings for Anglo Irish Bank and O'Donnell Sweeney on North Wall Quay. The remaining space is in the south docklands.

It is worth noting that the majority of space under construction, 53 per cent, is pre-let, while a further 28 per cent is under active negotiation, a factor that should help contain the vacancy rate. Just under half of the space under construction is due for completion during the remainder of 2008, with the rest due in 2009.

During the remainder of the year, take-up activity in the IFSC/docklands region is likely to remain moderate as the ongoing credit crunch and the weak conditions in the wider economic environment impede confidence levels in the market.

Therefore, take-up for 2008 as a whole is expected to be considerably lower than in the previous two years. As a result, supply levels in the region are expected to remain robust in the short to medium term, a factor that is likely to impact rental inflation.

As such, careful consideration should be given to any further speculative development in the region in order to facilitate a realignment of the market towards equilibrium. That said, the outlook for this region is very positive as it rapidly emerges into the financial and legal heart of the city.

Marian Finnegan is chief economist with DTZ Sherry FitzGerald