Survey shows record level of Dublin office lettings in Q3

MarketResearch:The office market, particularly in Dublin, remains buoyant despite fears of a downturn and turmoil in the financial sector, according to the third quarter office market review from CB Richard Ellis.

Letting activity seems set to break all records in Dublin and rental income is static but steady despite the fact that the overall vacancy rate remains in double digits, according to the review. This has allowed investors to remain confident in the marketplace.

Released this morning, the study provides a positive view of the market here and expects the wider European market to remain a target for investors.

It shows that office lettings signed in Dublin during the last three months have broken all records, reaching 80,190sq m (863,157sq ft) over the last three months. This pushes the current total lettings to more than 200,000sq m (2.153 million sq ft) with CBRE predicting a final 2007 figure of over 250,000sq m (2.691 million sq ft).

This represents "a level of letting activity never achieved in the Dublin market previously and unlikely to be replicated in 2008", the review notes. The expected level is well ahead of the average annual take-up in the Dublin office market over the last 10 years which stands at about 155,000sq m (1.668 million sq ft) per annum.

Interestingly, the top five lettings during the third quarter were to financial institutions, indicating that the upset in the sector caused by the sub-prime fiasco has yet to influence decision making here.

Not surprisingly, most of the activity was located in the city centre, with 41 per cent in the last three months in the Dublin 1/3/7 districts with another 22 per cent in Dublin 2/4. Another third was targeted towards the suburbs, with the majority of this activity in the south suburbs of the city.

Unexpectedly, the report found that 35 per cent of the activity was for pre-lettings during the third quarter. This, the report states, "clearly demonstrates the weight of prevailing demand for prime office accommodation in the Irish capital".

A further 34,088sq m (366,920sq ft) or 43 per cent of letting activity completed was in new buildings while the remaining 17,673sq m (190,230sq ft) or 22 per cent of leases signed were for second-hand office space. Investment activity remains strong, with €260 million in transactions signed during the third quarter, the report states. This brings to €675 million the total investment level for the year to date.

At this level the investment represents 41 per cent of all domestic investment so far this year, compared to the retail sector which accounted for 45 per cent of activity in the first nine months.

"Irish investors are encouraged by the fact that prime office yields in Dublin have remained steady at 3.75 per cent since the beginning of 2007 at a time when there is evidence of yields in some sectors and locations starting to soften as investors re-price risk against a backdrop of uncertain conditions in global financial markets," the report states.

"It remains to be seen what impact the ongoing turmoil in financial markets and resulting uncertainty will have on the Irish investment market in the medium term."

Other findings include that the overall vacancy rate in the Dublin office market remains in double digits at 10.2 per cent compared to 10.3 per cent at the end of Q2 and 10.5 per cent 12 months ago.

It also shows that prime office yields remain stable at 3.75 per cent, "although it is widely expected that secondary yields may weaken over the coming months as investors re-price risk amidst ongoing turmoil in the financial markets", the CBRE report states.

The medium term picture looks favourable, it adds, given that the pace of rental inflation is now easing. It suggests that the Dublin market is set for "upward movement in rental rates on the basis that the supply line going forward will be very controlled".

This is seen in demand which the report indicates remains strong. "There is outstanding demand for another 330,000sq m (3.552 million sq ft) of office accommodation in Dublin at present," the report says.

About 57 per cent of this is for office space in the city centre while 25 per cent is targeted towards the south suburbs. More than a third of total demand at present is for space offering more than 4,645sq m (50,000sq ft), something that could keep the market buoyant into the medium term.

"Our research indicates that approximately 100,000sq m (1.076 million sq ft) of new office accommodation is due for completion in Dublin before year-end while over 300,000sq m (3.229 million sq ft) of office space is due for completion in Dublin in 2008," the report states.

A further 350,000sq m (3.767 million sq ft) of new office accommodation has been granted planning and is scheduled for completion in 2009 although less than 20 per cent of this is actually under construction.

The "green agenda" is also increasing in importance, the report states. "Energy efficiency and sustainability are beginning to become increasingly topical, with many investors expecting that green buildings are likely to command higher values in the long-term."