Dublin office market puts quality high on the list for rentals

Latest trend shows growth in demand for high-standard, modern buildings, writes MARIAN FINNEGAN

THE OLD adage location, location, location is never more true than during a recession. When the going gets tough, demand seems to refocus its attention back to the quality end of the market with quality buildings in well-located districts benefiting most. This trend is particularly prevalent in the Dublin office market of late and is perhaps best illustrated by the comparative strength of take-up activity in central locations and the associated lower vacancy rates.

Of the 3.34 million sq m of office space in Dublin, 1.7 million sq m of that space is located in the Central Business District (CBD), where the vacancy rate stands at a relatively respectable 16.8 per cent compared to a market average of 24.1 per cent. This lower vacancy rate reflects the concentration of demand in the CBD in recent years.

Interestingly, this demand is more than just location sensitive, it is also focused on the quality end of the market. It is worth noting that 83 per cent of space transacted in the CBD during 2009 and 87 per cent during 2010, comprised Grade A space, where Grade A space represents the highest standard of office accommodation with raised access floors, suspended ceilings and air conditioning. Furthermore, 78 per cent of total space transacted in the CBD in 2009 and 56 per cent in 2010 was A1 space. A1 accommodation is the most modern of Grade A accommodation built post 2005. This trend was even more exaggerated during the first months of 2011 where 97 per cent of space transacted in the CBD was Grade A accommodation and 84 per cent was Grade A1.

That said, quarterly trends can fluctuate a lot with individual deals and the Google transaction in quarter one 2011 would have strengthened the focus on A1 accommodation.

Given the strength of demand for Grade A accommodation in the CBD it is useful to analyse supply. As of the end of quarter one in 2011, there was approximately 199,000sq m of Grade A space vacant in the CBD. Of this, approximately 120,000sq m was Grade A1. If the trends of the past number of years persist, this level of supply appears to equate to approximately a three to four-year supply level.

Furthermore, a potential occupier with a requirement for superior office accommodation within the CBD in excess of 5,000 sq m faces more limited options. An analysis of the floor-plate profile of the space reveals that there are just seven buildings greater than 5,000sq m actively available in the CBD of which only two buildings are greater than 10,000sq m.

Interestingly, there is reported demand from four to six large occupiers, including the Central Bank, in the market place at the moment all seeking properties larger than 10,000sq m with a notable preference for the CBD.

Supply is of course also a function of new development. However, as of March 2011, there was only 5,850sq m under construction. This development, Trinity Central, is located in the fringe area of the CBD. At the time of writing, more than 70 per cent of this space was already reserved.

So what does all this mean for the office market?

Firstly, it is fair to say that the CBD has weathered the storm of the recession somewhat better than the wider office market when analysing vacancy trends. That said, the CBD has suffered a dramatic loss in rental value with typical headline prime rental levels now over 40 per cent from 2008 levels. This has positively enhanced the competitiveness of the location which has strengthened demand for property located in the region.

In a normally functioning market, declining supply levels of this nature would support rental growth, however a changing profile of occupier in the CBD has delayed any such growth. That said, an econometric analysis of factors influencing rental performance in the CBD suggests rental growth in the order of 15 per cent is probable over a four to five-year period.

One way or another, there is no doubt that a pinch-point is emerging for supply in the CBD, particularly for larger lot sizes. This suggests that we can expect to see new development commencing in the heart of Dublin’s office market in the not so distant future.

Marian Finnegan is chief economist with DTZ Sherry FitzGerald