Office vacancy rate increases as investment market slows

In line with the slowdown in the property investment market, there has been a "dramatic" increase in the overall office vacancy rate in Dublin, says a report from Insignia Richard Ellis Gunne.

The study shows that the vacancy rate has increased from 3 to 6 per cent in the last three months.

Nevertheless, the takeup of space in the second quarter of the year reached 568,000 sq ft, bringing the total volume let since the start of the year to over 855,000.

The agency is forecasting that takeup for the full year will run to between 1.5 and 1.8 million sq ft.

However, a further 1.73 million sq ft of new space is due to be completed by the end of December, of which 13 per cent has been reserved and 6 per cent has been pre-let.

The greatest danger of over-supply was in the suburbs. Also disturbing is the fact that 25 per cent of all lettings in the second quarter of this year were for short terms.

The report says that seven deals due to be completed, each of them involving over 20,000 sq ft, will reduce the overall vacancy rate later this year to around 5 per cent.

Predictably, the vacancy rate in Dublin 2 and 4 still stands at around 2.6 per cent and there is a continuing demand from tenants and investors for these developments.

Gunne says that rental growth has levelled off since the beginning of the year and concessions such as rent free periods are becoming a feature of the suburban market in particular. Prime city centre rents stand at £40 per sq ft while suburban rents are around half that figure.

The report estimates that more than £70 million (€88.8m) has been invested in new Dublin office schemes this year.

Sean O'Brien of the agency says that restricted bank lending on office projects and lower institutional demand is putting pressure on yields.

This pattern is likely to continue into the second half of the year in the absence of lower interest rates. The report says that the slowdown in the Dublin office market is being repeated in office markets worldwide with little evidence of rental growth in Europe.

Despite the slowdown in the information technology industry since the beginning of the year, the high-tech sector still accounted for 63 per cent of the new space committed in the second quarter of this year. This was largely accounted for by Microsoft's decision to rent 180,000 sq ft in the Atrium Office Park at Sandyford.

A further 25 per cent of the new space rented in the last three months was taken by companies involved in the financial services.

Significantly, almost 40 per cent of office deals in the last three months involved lettings of between 50,000 and 100,000 sq ft. The report says that Dublin now has the lowest unemployment rate of any European city. In this labour market companies could not attract staff to office locations which do not offer adequate transport, shopping, parking and creche facilities.

The promise of these facilities being put in place in the future is clearly not enough to attract staff to suburban locations, irrespective of the quality of the work environment on offer.

For this reason many suburban office schemes are struggling to attract tenants.

Nonetheless, 54 per cent of take up in the second quarter of 2001 occurred in suburban office locations.