Trend towards higher take up and lower vacancy rates

OfficeOutlook: The clouds are definitely beginning to lift from the office market though it will be some time before we can anticipate a return to overall strong rental growth, writes Marian Finnegan

If there is one section of the property market that benefited most from riding the crest of the Celtic Tiger wave, only to suffer the slings and arrows of the global economic downturn, it is the office market.

At the height of the office market boom, during the late 1990s, the Dublin market was enjoying average take up of 150,000-200,000sq m (1.6-2.15 million sq ft) per annum compared to take up levels of 40,000-80,000sq m (430,000-861,000sq ft) during the first half of that decade.

During this time vacancy rates fell to low single digit figures with a resultant acceleration in rental inflation. Quoted prime rents in Dublin city centre rose spectacularly from approximately €170 per sq m (€16 per sq ft) during the early 1990s to reach a peak of just less than €550 per sq m (€51 per sq ft).

The strength of this phenomenal performance was perhaps only replicated by the subsequent slowdown as a result of the global economic downturn which occurred after the September 11th terrorist attacks in the US. This is perhaps best illustrated by the rise in the vacancy rate from 4.5 per cent at the end of 2000 to a peak of 17.2 per cent during quarter four of 2003, after which it declined moderately to reach 15.6 per cent during quarter one of 2005.

Such a phenomenal period of growth followed by a dramatic slowdown is not unique. It was also witnessed during the late 1970s early 1980s and again during early 1990s though then on a much smaller scale.

So what does that mean in terms of the current office market and what can we expect from the next decade?

To begin with, there are already some clear indications that the Dublin office market is showing signs of a tentative recovery with a continuous, if modest, decline in the vacancy rate. While take up levels remained relatively moderate in 2004 with 124,500sq m (1.34 million sq ft) transacted, they rose significantly during the first quarter of this year with the highest level of transactions recorded in over two and half years.

Following the increase in take up activity during quarter one, the supply of accommodation in the office market eased somewhat to reach 387,200sq m (4.16 million sq ft), almost a fifth of which was under active negotiation. This was accompanied by a reduction in the vacancy rate.

Taking a longer term perspective, an analysis of employment trends suggest that we can anticipate a relatively strong period of employment expansion which will underwrite the performance of the office market in the short to medium term. Translating such employment growth into gross take up activity would suggest that the quantity of office accommodation taken up will average in excess of 170,000sq m (1.829 million sq ft) per annum between 2005 and 2010. Such a strong level of take up activity bodes well for the future performance of the industry.

Despite this, supply remains a concern in the office market, particularly given the strength of accommodation under construction. At the end of the first quarter of 2005, there was a total of 273,900sq m (2.948 million sq ft) of office accommodation under construction in Dublin, 17 per cent of which was pre-let.

Taking into consideration the proportion of space under construction which is not pre-let and current available space suggests a total potential supply of over 614,000 sq m (6.609 million sq ft) of office accommodation.

Such strong supply levels - particularly in suburban locations - will inevitably inhibit the recovery of the office market, despite good demand growth. As such rental levels are expected to remain stable rather than accelerate in the short to medium term, the extent of tenant incentives being offered should continue to decline.

Looking to the immediate future, overall confidence levels will be boosted by a number of investment announcements for the Dublin region from the IDA since the beginning of the year.

This includes Yahoo establishing its European headquarters in Eastpoint Business Park while Microsoft is due to set up a R & D facility in Sandyford. In addition, Amazon is planning to establish a European and network operations centre in Dublin, while both the US company Hartford Financial Services Group, and the Australian company Market Boomer are planning to open headquarters buildings in Swords and the Digital Hub respectively.

All in all, the clouds are definitely beginning to lift for the office market though it will be some time before we can anticipate a return to overall strong rental growth. That said, the combination of focused demand and lower vacancy rates suggest that the central business district will enjoy much a more rapid recovery than outlying areas.