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Peak office at last

After years of sharp rises since the Dublin office market bottomed out in 2011, headline rents may be close to a level last seen in 2007

Many estate agents are predicting only very moderate rent rises at the top end of the market over the next few years and some even see a tempering of rental expectations. "This is not necessarily a bad thing, as prime rents in Dublin are more expensive than in many of the European capitals we are in direct competition with, an issue that is particularly pertinent in terms of attracting Brexit-related activity," says Marie Hunt, head of research at CBRE. "We need to ensure that rents in Dublin remain competitive in a European context."

Currently, headline rents in Dublin 2 are about €673 per square metre (€62.50 per square foot). Hunt says they have “remained stable at this level for several quarters now” and, while there may be a “little further to go before prime rents top out in this cycle, we are not expecting significant upward movements from this point. Indeed, our latest set of econometric forecasts see rents peaking at €683 per square metre, or €63.50 per square foot.

“As new supply starts to come on stream over the next two to three-year period, the likelihood is that prime rents might moderate slightly from these levels, eventually settling at or just below €645 per square metre or €60 per square foot. That is not to say that a small number of transactions, such as office suites, might achieve slightly higher headline rental levels but, these trophy deals aside, the general trend is towards stabilisation at the prime end of the market.”

Enda Moore, a director at Hooke & MacDonald, sees prime Dublin office rents "nearing a peak" and are likely to remain "stable in the medium term" while Deirdre Costello, regional director at JLL, sees only "limited further rental growth in the city centre and this will be building-specific. The best buildings in the best location will still see some growth but, on the whole, the major growth has happened."

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However, Ronan Corbett, head of offices at Cushman & Wakefield, points to a slowdown in construction starts on new-build office space. "A lot of the space being built now will be finished out in a year and, while headline rents have stabilised, what's going to happen to rents in 12 to 18 months' time when there's a marked reduction in supply to the market, particularly in the city centre? Assuming demand remains strong, I can see rents starting to rise again in a year's time."

Andrew Cunningham, director of offices at Savills, maintains the company's "econometric model indicates prime rents will peak in 2018/2019. The predicted timing of the peak is also drifting given the continual and consistent deferral of new commercial office supply versus earlier estimates of same which is being caused by limited availability of development funding."

It’s interesting that the moderation in rent rises comes at a time when demand for office space remains robust – JLL puts take-up figures so far this year at an “exceptionally strong” 148,645sq m (1.6 million sq ft) with a further 92,903sq m (1 million sq ft) reserved.

But, while much of the recent increases – rents doubled between 2013 and 2015 – were driven by the fact that virtually no new office construction took place in the five years after the crash, it is clear the current moderation in rents is being driven by a boom in office building.

Crane count

The Irish Times began its crane count on February 1st, 2016, when 34 cranes were visible over the centre of Dublin from the seventh floor of the newspaper's offices on Tara Street. By June 1st, 2017, that total had more than doubled to 70. While some of this construction activity relates to apartments and student accommodation, the majority is new-build office space in the prime locations of docklands, Dublin 2 and Dublin 4.

Moore estimates there is 335,000sq m (3.606 million sq ft) of new office space “under construction at present”, and this increased supply is “one of the main factors leading to a moderation of prime office rents”.

"The office market is now decisively back in the development phase and we estimate that new delivery will be in the order of 7.2 million square feet between 2017 and 2019 or around 2.4 million square feet annually," says James Meagher of Knight Frank. "The owners of many of these new buildings are institutional investors and REITs who are de-risking their portfolios by pre-letting their buildings at present rental values rather than waiting to do a deal when their developments reach practical completion. This has moderated rental growth since the end of 2015."

Moore says “it is interesting to note that of the office space under construction, approximately 40 per cent of this is already pre-let or reserved and this proportion will reach close to 50 per cent by the end of the year. There is evidence of continuing strong demand for the new space being developed and this augers well for the majority of the accommodation being let upon completion.”

JLL puts the quantum of space under construction and refurbishment at more than 371,612sq m (4 million sq ft) and claims that 30 per cent of this is pre-let with a further 30 per cent of the remainder reserved.

Hunt points out that while the supply of new office stock over the next few years will be “well controlled” – that is pre-let or reserved – there is an awareness in the marketplace of the “potential pipeline” of further office space “considering the number of schemes in the planning process and this is tempering rent expectations”.

However, Aoife Brennan at Lisney says that only 187,500sq m (2 million sq ft) of the office space under construction is not pre-let. "This is less than one years' supply," she says. "It is a maturing market that is causing rents to stabilise at levels suitable to our market."

The great “known unknown” in the Dublin office market at present is what medium to long-term effect Brexit will have on the demand for space. There have been a number of Brexit-related transactions over recent months and the likelihood is that this will increase over the next 12 months as many of the companies that are currently scoping opportunities commit to specific buildings.

Financial firms establishing or expanding their operations in Dublin on account of Brexit already include JP Morgan, Barclays, Bank Of America, Merrill Lynch and Citigroup. "Our research shows that just less than 20 per cent of all leasing activity in Dublin in the first half of 2017 was from UK companies, which is twice the normal level of UK activity," says Hunt.

However, Corbett says “there hasn’t been a torrent of Brexit-related deals done” and, while Brexit will be a positive for the Dublin office market, he believes it’ll be more of a “medium-term factor as many companies are still sitting on the fence to wait and see what form Brexit will take before making a commitment”.

The main driver of demand for office space in Dublin at the moment is coming from the technology and finance sectors. "If you look at the top deals signed in the first half of 2017," says Costello, "it's companies such as Facebook taking 175,000sq ft in The Beckett (near the IFSC), AIB taking 152,000sq ft in Central Park (Sandyford), Indeed taking an additional 50,000sq ft in St Stephen's Green and Google expanding into another 55,000sq ft in Velasco (Dublin 2)."

Corbett says the north docks will see the next wave of office development as there are very few sites or refurbishment opportunities left on the southside. “The north docks will be the place to be,” he says, “as it has fast-track planning with the special development-zone status and can accommodate big floor plates.”

While the top end of the market may be at its rental peak, most estate agents believe that secondary and suburban office markets – particularly in the Sandyford area – may still see more rent increases in this cycle.