Rents for offices in prime locations may reach £40 per sq ft by year end

In the past four years, prime rents for third generation space in Dublin have almost doubled, rising from £18 per sq ft in 1996 to an average £33 to £35 per sq ft today.

This acceleration in rental levels was generated by a significant imbalance between the demand for and the supply of office accommodation in the Dublin market. Despite a notable increase in the quantity of office accommodation under construction and improvements in the planning process, we are likely to witness further rental inflation in the months ahead, with every indication that £40 per sq ft could be achieved for smaller lot sizes in prime locations by the year end.

To put this in context, the escalation in rental levels in 2000 is anticipated despite an estimated 2.8 million sq ft of office accommodation recorded as under construction at the end of the first quarter of the year. This in itself is a real indicator of the build-up of unsatisfied demand in the market at present. In the light of this unprecedented office rental inflation, it is worth examining some of the factors, which combine to cause it.

Firstly, there is the continuing success of the Irish economy, with growth in excess of 7 per cent forecast for the current year. In tandem with that, the total number of people at work has accelerated in recent years, rising to a growth of in excess of 100,000 people in 1999.

The workforce increase has placed extraordinary pressures on the available supply of suitable office space, particularly in Dublin, which accommodates an estimated 40 per cent of office workers.

Secondly, the escalation in employment growth and the resultant labour market shortages has made employers more location-sensitive, anxious not to disrupt their workforce through a move to a new location. This has further intensified the demand for accommodation in the traditional office market of Dublin 2 and 4 and adjacent city centre locations.

Thirdly, increasing building costs are affecting rental levels, with some developers expecting tenants to pick up some of the tab for rising costs, where pre-let deals are transacted 18 to 24 months before delivery.

The chronic shortage of supply is perhaps most pronounced for tenants seeking larger lot sizes. Such tenants are now being forced to commit to space which will not be available for 12 to 18 months, while acquiring small office units in the interim to accommodate the over-spill of employees - something unheard of two years ago. Another interesting development in the market centres on the profile of tenants seeking space. The emerging high-tech/dot.com sector, which accounts for an increasing portion of revenue generation in the economy, is facing problems securing lease agreements, competing as they do with a wide variety of firms offering more secure covenant structures.

An interesting factor in this supply shortage/rapid rental inflation equation is the transformation of the role of the landlord. Landlords, akin to employees, are quite literally rewriting the rulebook in many instances. For example, break options, particularly in the first 15 years, are now extremely difficult to achieve; where breaks are available, a significant penalty is usually incurred. It is therefore perhaps ironic that one of the outcomes of the ever-changing structure of the office market is that tenants themselves are now becoming landlords. This turnaround derives from the fact that tenants are increasingly forced to commit to leases for larger lot sizes than they require.

On a positive note, lucrative sub-letting agreements often help to compensate such tenants for incurring the risk. The office market, like other sectors in the property market, is undergoing a period of rapid change. The goods news on the horizon for potential tenants is that the pace of rental inflation currently in place in the market will begin to stabilise in the next 12 to 18 months as some of the larger developments currently in the planning process begin to come on stream.

As supply shortages diminish and occupiers become more discerning, accessibility of accommodation to parking facilities and/or transport nodes is likely to become a significant factor in determining the future hot spots for office developments. The persistent strength of the economy and therefore labour market requirements should ensure that employee preferences continue to influence occupier demand in the future.

However, the combination of employee preferences for in-town locations with the satisfaction of parking requirements will inevitably become increasingly difficult, particularly given recent changes in the planning laws which impact on the quantity of car-park spaces in new developments.

Indeed, quality of out town locations close to the ring road/M50, which offer more competitive rents and ample parking are likely to be viewed as increasingly attractive by many companies seeking larger lot sizes. The trend set by Eircell and First Active could well be one that is increasingly popular in the future.