High vacancy rate slows office recovery

A FULL RECOVERY of the Dublin office market over the next 12 months will be hindered by the stubbornly high vacancy rate in the city, according to the latest office report from estate agents Jones Lang LaSalle.

It says that much of the vacant space is either old and unlettable due to its specification and location or, alternatively, was available by means of a sub-lease or assignment. Neither option was in high demand by tenants and this may mean that vacancy levels will only reduce slowly and moderately as the performance of the office sector continues to improve.

Letting activity in the Dublin market continued to improve in the third quarter of the year with 54 deals completed totalling 32,886sq m (354,000sq ft). This was the highest number of quarterly transactions recorded in the market in over a year. According to Dr Clare Eriksson, head of research at Jones Lang, tenant demand for offices could exceed 1.1 million sq ft by the end of 2010, representing an annual increase of 49 per cent provided all the space booked for Q4 is converted into completed lettings. As at the end of September, office demand in 2010 was already 16 per cent more than for all of 2009. The report says that there is every chance that the Dublin market can sustain these take-up levels during the next few quarters as there is currently 46,450sq m (499,983sq ft) of active tenant demand identified for the city.

However, a large percentage of the firms are settling for a smaller volume of space. While the average deal stands at 608sq m (6,544 sq ft), about two-thirds of all transactions in the third quarter were for less than 371sq m (3,993sq ft).

Most demand for space is coming from the business services sector – mainly IT support companies, outsourcing companies and recruitment firms – which accounted for 45 per cent of all lettings in Q3.

The education and media and telecommunications sectors were responsible for a further 17 and 11 per cent, respectively. The largest deal in Q3 was 3,842sq m (41,355sq ft) taken by Google in Eastpoint. The most significant suburban letting was the 3,529sq m (37,986sq ft) leased to Stream International in Swords Business Campus. Almost 60 per cent of all lettings in Q3 were in Dublin city centre with the Dublin 2 area alone attracting 45 per cent of the tenant demand.

The report also shows that the vast majority of firms looking for office space in the last quarter opted for new leases (68 per cent of all deals) as against 32 per cent settling for subleased space.

One of the positive features of the letting programme has been the fact that 53 per cent of the extra space has been taken by indigenous companies embarking on an expansion of their operations. A further 21 per cent of deals involved new companies establishing a presence in the Irish market for the first time.

The remaining 26 per cent of all lettings were undertaken by companies relocating their business within the city. Fionnuala Ó Buachalla of Jones Lang says many of these companies are taking advantage of the “tenant-friendly market conditions” and recognise that as take-up increases quarter on quarter, these terms will start tightening.

Meanwhile, Marian Finnegan, chief economist with DTZ Sherry FitzGerald, said the optimism towards the performance of the office market noted in the opening half of 2010 waned somewhat with the reduced activity in quarter three. That said, the market still looked on target to achieve up to 100,000sq m (1,076,390sq ft) of gross take-up in the full calendar year.

A report from the agency noted the tightening of future supply with only 29,800sq m (320,764sq ft) under construction all of which is due to be delivered in 2010.

Combining the space that is under construction and not pre-let with availability yielded a potential supply of 790,000sq m (8,503,481sq ft). Given the existing quantity of stock available in the market, DTZ was not anticipating significant new construciton until 2012.