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Where Does the Office Market Go from Here? Demand Vs. Supply
This article was written for our Construction Opportunities 2017 Report by Hannah Dwyer, Associate Director & Head of Research, JLL Ireland (a Real Estate Professional Services Firm)
2016 has been a year of many surprises, and at a time when we look for 2017 predictions, there are many uncertainties surrounding global economic and property markets that could fundamentally alter market dynamics, and therefore predictions. This is very much the case for the Dublin office market, which as an open market, is open to occupiers, innovation and change.
Before we look forward, let's take a step back for a moment, and review the most recent cycle in property. In the last 5 years, the office market has seen a significant turn-around. Cast your mind back to 2011: the vacancy rate was over 21%, there was zero construction activity, prime rents were €30 per sq ft and take-up was 1.7 million sq ft. Fast-forward 5 years and the vacancy rate is sub-8%, there is over 4 million sq ft of new office space under construction, prime rents have doubled to €60 per sq ft, and take-up is expected to exceed 2.5 million sq ft for 2016.
Throughout this period, one thing did remain steady: take-up, and with an over-supply of stock from the boom, there was enough supply to meet this demand. With no construction over the same 5 years, this supply has steadily decreased, and the vacancy rate, and therefore choice for occupiers, has also fallen.
Demand for Dublin office space has historically been steady, with average annual take-up levels of 2.0 million sq ft for the last 10 years and 2.2 million sq ft for the last 5 years. In 2015, take-up was 2.9 million sq ft, and 2016 looks set to achieve similar levels. Dublin is therefore a healthy-performing market. There has been particularly strong demand from technology and IT companies, accounting for an average of 36% of take-up per annum. We have seen companies like Amazon, Workday, Twitter, Google, Stripe, Sage and Oracle all occupying space, either relocating to Dublin, or expanding from existing bases.
In the last 18 months, we have also started to see an increase in activity from professional-services firms and financial-based companies such as Grant Thornton, Fidelity, Kennedy's, BNY Mellon and Accenture. This is a trend that was happening in a pre-Brexit world, but is likely to accelerate in the next 12 months.
In terms of existing availability, the vacancy rate has fallen from 21.4% to the current vacancy rate of 7.8% in the last 5 years, with even tighter availability of completed buildings in the city centre (3.9% vacancy rate). There is a real shortage of Grade A space in particular size categories and core locations. The Dublin overall vacancy rate is below the European average vacancy rate of 8.5%.
Choice for occupiers however, is set to increase, with a strong pipeline of new and refurbished space to be delivered in the next 2 years. There is currently 5.3 million sq ft of office space under construction and under refurbishment in Dublin. 40% of this is already let, leaving 3.2 million sq ft of supply. The majority of this space (88%) is in the city centre. Of the stock currently under construction, 3.1 million sq ft is new to the overall Dublin market, or 8% of total stock. Based on what is under construction and under refurbishment or due to start on site in the next few months, 2.2 million sq ft and 1.9 million sq ft of available space is expected to be delivered in 2017 and 2018 respectively. It is expected that some of this space will be let before completion, therefore not releasing any new available stock to the market.
In addition, there is 5.9 million sq ft of space that has full planning permission, and an additional 3.5 million in the pre-planning or planning submitted phases. Not all of these schemes will be delivered, and it is difficult to predict completion dates for any schemes that are not currently on site. An average office building takes between 18-24 months to complete, so unless it is currently on-site, delivery pre-Q1 2019 is unlikely. Assuming these schemes are delivered in the next 3-5 years, then it could deliver a further 2 million sq ft per annum of new space to the market, which is in line with long-term average demand.
A trend we have seen with current stock under construction, is that developers are bringing different schemes on-site on a phased basis. It is hoped that future pipeline schemes are also delivered with this phased approach, so as not to release stock to the market at the same time. Any speculative developer will always review delivery dates of other competing pipeline schemes, and will also undertake an in-depth analysis of market demand and occupier activity to ensure both demand and supply dynamics are balanced.
In terms of letting activity of new space, pre-lets, which see tenant's committing to occupation before building works commence, are not a common feature in the Dublin market in this development cycle. There have been 4 pre-let deals in the last 3 years including Arthur Cox (2014), SAP (2015), Air BnB (2015), and Grant Thornton (2016), which range in size from 27,000 sq ft to 130,000 sq ft. What we are increasingly seeing however, is mid-lets of schemes, with tenants signing for space part-way through construction. This gives occupiers a greater level of certainty regarding delivery dates and is a trend we are expecting to see continue for new builds. Recent mid-let deals include Bank of Ireland, Twitter, Shire, Aercap, ESB, and Jazz Pharmaceuticals. 15% of take-up in the last 2 years has been for either a pre-let or a mid-let, plus there are 3 more that are reserved and due to sign before the year-end, including Amazon, OPW and NTMA.
The average deal size for pre-lets and mid-lets is 67,000 sq ft. This is a much bigger size than the overall Dublin average take-up size which is 12,326 sq ft. Historically, take-up activity has focused on smaller-sized deals, with a few larger-sized deals that boost total take-up volumes per annum. 67% of deals in the year-to-date were in the sub-10,000 sq ft category, and 18% were in the 10,000–20,000 sq ft category. For the last 10 years, there has been approximately 6 deals greater than 50,000 sq ft per annum on average. So far in 2016, there have been 5 deals in this size category, including Intercomm, ESB, FIL, Shire and Grant Thornton.
In terms of rents, prime headline rents are €55 - €60 per sq ft. This is for the best quality Grade A buildings, in the best city centre locations. Rental levels will vary and are very building specific. Rents achieved by landlords are based on location, specification and lease flexibility. As the supply pipeline comes on stream, we are expecting rents to stabilise and remain at €55 - €60 per sq ft. Our rental forecasts peak at €62 per sq ft in this cycle, but this rental level will only be achieved for a select few, prime, and possibly smaller lettings. Actual rental levels will be dependent on future demand and supply levels.
In summary, we are forecasting steady levels of both demand and supply for the next 5 years, both of which are needed for a functioning and steady market. Dublin is an established, open economy with a long history of FDI and indigenous growth. We are expecting this to continue, with potential extra demand from firms in the UK. Supply, although limited at the moment, will increase in the next few years, with a number of pipeline schemes for the short and medium-term. There is however, a lot of uncertainty in the short-term for global economic and property markets, and therefore it will be important to continue to analyse market demand and supply dynamics, to ensure sustainability continues.
This entry was written by Dovetail , posted on Monday, February 27, 2017 Bookmark the permalink. Follow any comments here with the RSS feed for this post .
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