Property outlook 2019: Expanding tech firms to drive office demand

‘There are new opportunities and plenty of growth in flexible office space’

TMT – technology, media and telecommunications – companies continue to expand in Ireland.

TMT – technology, media and telecommunications – companies continue to expand in Ireland.

 

Which sectors of the market will be most active next year?
The office leasing sector will continue to perform strongly, with no sign of a slowdown in occupier demand. Take-up will again likely be dominated by expanding existing occupiers, particularly TMT companies (technology, media and telecommunications) looking for additional space.

Large deals will continue as with this year, which has seen three occupiers – Facebook, Google and Salesforce – account for just over 40 per cent of take-up. The private rental sector (PRS) as an investment class has been very active, and we are expecting this to continue next year.

There is very strong demand from investors, with volumes in 2019 dictated by the level of supply that comes on to the market. If good-quality assets become available, we expect them to be met by significant investor demand and strong pricing. There is €8 billion of current active interest in this sector, much of it targeting access at the development stage.

Have rents and yields peaked across the various asset classes?
We are entering a period of stability for the property market, which has seen a significant turnaround in the last number of years. There are always opportunities to generate value, for example through clever asset management, or through development and refurbishment, so this is where we may see activity from investors who are seeking higher returns.

Otherwise any capital growth will be modest at best. We do expect to see further rental growth in some sectors. Industrial rents are expected to increase by an average of 3 per cent a year up to 2022, which is one of the highest in Europe. Office rents are stable at €55- €60/sq ft, but we may see some lettings at levels above this for the best new office buildings in the core locations.

Where are the best investment opportunities at this stage?
As mentioned above, PRS will be very active because of value-generation opportunities in this space. Industrial and logistics (I&L) is also likely to be a sought-after investment class. Fundamentals are strong for the sector, with steady occupier demand against a backdrop of limited good-quality supply driving rent upwards.

Performance in the sector is being boosted by the online retail industry, plus Brexit may further enhance demand, as UK I&L companies look for a market with stability and no restrictions on the movement of goods.

One thing to watch out for in 2019?
Brexit will continue to cast an air of caution on all property sectors by stalling decision-making. Interest rates and global capital markets also need to be factored into decision-making. The current benign interest rate environment favours investors, and any changes will ultimately impact on end values and pricing.

In terms of a property-specific theme, flexible office space will be one of the biggest shifts across the real-estate industry that we have ever seen. Europe’s flex space is set to grow by up to 30 per cent per year over next five years; and, for investors, flex space could offer new opportunities for those who embrace innovation and change.

John Moran is chief executive at JLL

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