Dublin city centre office rents will plateau this year, but concerns about oversupply have been overdone, according to HWBC’s Dublin Office Market Review published today.
2017 was a record year for take up of space with over 3.57m sq. ft. of take up from high profile tenants such as JP Morgan, AIB and Facebook.
Grade A CBD office rents grew by 8% last year to €65 per square foot, and look set to remain at that level in 2018, according to HWBC’s forecast. Grade A suburban rents also grew by 8% to €30 per sq. ft. last year and are forecast to grow a further 7% by the end of 2018 to around €32 per sq. ft.
HWBC’s report finds that whilst construction of new space is scaling up in Dublin, the fact that over 80% of new stock completed in 2017 was let on or before completion should reassure investors concerned about oversupply. Demand for new construction in Dublin is to accommodate growth of existing companies and not any predicted wave of relocations from Brexit. Of the top 10 deals in 2017 only JP Morgan was Brexit related and any increase in Brexit enquiries will be an additional layer of demand for an under supplied CBD market.
Downside risks to consider are the market’s reliance on foreign direct investment, changes in the US corporate tax code, and uncertainty around the wider economic impact of Brexit.
The continued shortage of Grade A space is one of the factors in the rise of the co-working sector in Dublin, with both WeWork and Iconic Offices in aggressive expansion mode in 2017. This market is serving the needs of early stage technology companies looking for maximum flexibility for growth, but also increasingly the corporate market for expansion and temporary projects.
Tony Waters, Managing Director of HWBC said: “We heard comments in Davos last week that there is a bubble in the Dublin office market, with the building of new supply running ahead of demand for new space. Given our recent history it is sensible to be prudent after 5 years of gains which have seen city centre office rents more than double, but all the indicators are that there is ample demand for space as it is completed, and close to 40% of the space planned for 2018 is already pre-let.
It remains a landlords’ market, with further hardening of lease terms expected this year, including reduced rent free periods and break options pushed out, rather than prime headline rents continuing to rise at a similar pace to recent years.”.
HWBC’s report shows that between 2012 and 2017 prime city centre rents rose by 117%. The increase in suburban office rents was a more modest 85%, however as blue-chip corporates like AIB and Google take significant suburban space, HWBC sees scope for further increases in suburban rents by 7% next year, with better lease terms and space availability suiting the profile of companies with large space requirements.
Paul Scannell, HWBC Director and Head of Offices said: “The improved availability of space in the suburbs is becoming an attractive option for large corporate occupiers and we see more scope for rent rises this year in the preferred locations such as Sandford and Leopardstown. Dublin 18 is starting to see renewed speculative office development with over 550,000 sq. ft. completed in 2017, including the new Microsoft headquarters in South County Business Park.”
HWBC’s report also notes that from 1st January 2019 new accounting standards will mean that property leases must be recorded on corporate balance sheets as a liability. This is likely to incentivise certain tenants to seek more lease flexibility and we have seen some examples of this in 2017, with companies opting for a shorter lease term initially with a right to extend, rather than the more traditional 20 to 25-year lease with a tenant break option.