Take-up of accommodation this year will most definitely be greater than that of 2009 and by year- end, the figure should stand at over 100,000 sqm. There are a number of reasons for this. Firstly, the IT sector remains relatively active. This underlines the importance of technology in the overall economy. Secondly, the favourable corporation tax rate remains in place and continues to attract international occupiers. Finally, there are good opportunities on offer and significant value can be had by those seeking space.
Availability
The total vacancy rate across Dublin now stands at 23.1% compared to 22.6% at the end of 2009. This represents 808,000 sqm of accommodation. While vacancy spiraled upwards between 2007 and 2009, since the end of last year it has remained reasonable static. It is however too high and indicates that a balanced market is a long way off.
As might be expected, vacancy rates vary greatly across different locations. For example, the Dublin city centre rate is now estimated to be 19%, whilst the west suburbs rate is as rate as 34%.
Activity
Encouragingly, there are some large enquiries in the market, mainly by companies in the IT sector. During the last quarter, a number of these converted into transactions, notably:
The third quarter recorded a total take-up of 32,178 sqm, bringing the year-to-date figure to 83,000 sqm across 50 transactions. Given the number of deals at legal stage, we are confident that the full year's take-up will exceed 100,000 sqm. This is still some way removed from the 2007 record take-up of 299,009 sqm.
If average take-up levels for the past 15 years are considered and regard is given to functionally obsolete buildings (which we estimate at 16% of all available accommodation in the entire of the Dublin region), there will be no need for speculative development for several years to come. This will have severe consequences for the construction industry, employment in that sector and of course the revenues generated directly and indirectly for the Exchequer.
Rents continue to fall and Lisney's commercial rental indices show that overall office rents in Dublin have fallen by 17.17% for the year-to-date and 5.48% in Q3. As the year advanced and as a consequence of declining rental values, a number of landlords have reduced quoting rents in an attempt to secure income streams and get tenants into buildings.
Where companies take space, they can secure quality accommodation on very flexible terms. Fortunately, overseas companies continue to see Ireland as an attractive location to base their European headquarters due to our skilled workforce and favourable corporation tax rate. This is proven by the leases signed earlier this year by Google, Yahoo, Merck, CitrixDunn and Dun & Bradstreet. That said, Dublin has slipped from 18th to 20th position in this year's "Best City to Locate a Business" ranking published annually by Cushman & Wakefield.
The relative importance of the financial sector declined yet again in Q3 and only accounted for 6% of take-up. This downward trend started in the latter half of 2007 when the sector accounted for 44.8% of take-up.
IT has continued to dominate and represented 35.8% of activity in Q3 compared to 25.7% in 2009 and 19.8% in 2008. However, in absolute terms the total accommodation acquired by IT companies is significantly down on previous years.
The average lot size of each transaction has been decreasing. In Q3, the figure stood at 644 sqm. Looking back at previous years, this figure was in excess of 1,100 sqm. With all occupiers reluctant to commit to unnecessary space and adopting a more cautious approach, it is not hard to understand why this is the case.
Despite the negative sentiment, there are grounds for optimism. Firstly, rents have reduced dramatically over the last three years representing a drop of almost 53% according to the Lisney Rental Index. Such is the scale of the reduction that capital values for some office buildings are well below economic replacement cost. In some instances, rents achieved for office buildings are broadly similar to the rents that were achieved between 1997 and 1999.
In terms of market activity, the last time take-up was below 100,000 sqm was in 1995. Over the past 15 years, the average amount of take-up per annum was approximately 174,000 sqm.
Outlook
With no new space under speculative construction other than a few buildings that are being finished out, it is unlikely that the vacancy rate will increase significantly further. It is possible that a number of well located but somewhat outdated city-centre buildings will generate some interest over the coming months as they are being offered at such low rental levels. These could potentially claim occupiers who would traditionally have sought accommodation in suburban areas. This is positive news for landlords who seek to generate some income, albeit low, and maintain occupancy to avoid maintenance costs and local authority rates charges.
We expect 2011 to be another difficult year. However, vacancy rates should start to fall in the city centre as the better leasing opportunities are taken up.
We believe that it would be in the interest of the economy if significant incentives could be introduced in the Budget to improve the carbon emission rates of the older buildings and to encourage those occupiers in the smart economy by offering them rent relief.
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