Dublin Office Sector in Good Shape

Property consultants CB Richard Ellis this week launched their latest research report on the Dublin office sector, which concludes that despite the fact that the investment and development sectors of the commercial property market remain stagnant as a result of a lack of funding, the occupier sectors continue to perform strongly and the office sector in particular, is in good shape.

According to CB Richard Ellis, almost 45,000m2 of office lettings were signed in Dublin in Q1 2008, a level of take-up which is more than 10% higher than the five-year average for Q1 take-up in the capital. In total, according to the report, almost 70 office lettings were signed in Dublin since the beginning of the year, suggesting that the market is not wholly reliant on large corporate lettings, many of which are likely to sign over the coming months.

While one would expect potential office occupiers to start scaling back their office requirements and possibly deferring relocation decisions in light of growing economic uncertainty, CB Richard Ellis say there has been no discernible impact on the demand for office accommodation in the Dublin market since the beginning of the year. However, they say that lease negotiations are understandably proving more protracted in the current economic climate, with occupiers proceeding cautiously.

According to the new report, observers are watching the office sector closely, fearing that occupier demand is likely to decline and that oversupply is looming. With this in mind, CB Richard Ellis has conducted extensive research on potential supply and has concluded that office development is coming on stream on a very controlled basis. The report shows that demand is currently running at more than twice 10-year-average take-up levels in Dublin. It suggests that as much as 300,000m2 of new office accommodation is due to be completed in Dublin over the next two-year period but that speculating on what schemes are likely to achieve planning, obtain funding or be developed from 2010 onwards is too speculative.

According to Marie Hunt, Director of Research at CB Richard Ellis, “New office developments that have not yet broken ground could potentially be put on hold given the current market environment. More rigorous assessment of new office schemes is a welcome outcome of the current funding crisis as this will ultimately prevent oversupply and sustain rental values, even if occupier demand starts to ease”.

According to the Dublin Office Market View publication for Q1 2008, 72% of office accommodation signed in Dublin in the last three month period was located in the city centre region with the Dublin 2/4 district accounting for two thirds of these lettings. A further 28% of office lettings signed in Dublin city centre in Q1 2008 were located in the Dublin 1/3/7 district. The suburbs accounted for 28% of office lettings in Dublin during the first quarter of 2008.

James Mulhall, Director of Office Agency at CB Richard Ellis said “It would appear that office occupiers are becoming even more focussed on city centre properties as economic prospects decline. In total, 32,049m2 of office lettings were concluded in Dublin city centre during Q1 2008. Two thirds or 20,998m2 of the office accommodation let in the city centre during the three month period was located in the Dublin 2/4 district. In addition, 76% of current demand requirements are for properties in Dublin city centre”.

According to the report, a lack of funding arising from the global credit squeeze has stalled investment transaction activity across Europe in recent months, a trend that is very evident in the Irish market with only five investment transactions signed in Q1 2008. Total investment spend in the first quarter of the year was only €235 million. CB Richard Ellis suggest that with transactional activity effectively halted until such time as conditions in the credit markets alleviate, it is difficult to see how last year’s total investment spend by Irish investors of over €2.2 billion in the Irish market and a further €10 billion overseas, can be replicated in 2008.

Yield shift is being experienced in many property markets across Europe, but not to the same extent as that experienced in the UK market. Many European office markets saw the first signs of an increase in prime yields during the last quarter. Prime office yields in the Irish market have shifted by 25 basis points to approximately 4.0% since the beginning of the year, having remained stable at approximately 3.75% for all of 2007. CB Richard Ellis believe that secondary office yields in the Dublin market now range between 4.75% and 5.25%, although there has been no transactional activity to support this.

In the absence of the yield contraction, significant rental growth and a considerable weight of money chasing investment product, all of which boosted total returns in the office sector in recent years, CB Richard Ellis believe that it is inevitable that total returns in the Irish commercial property market, like many other markets across Europe, are now moderating. At this point, they say that it appears that total returns are following a long-term cyclical pattern where the most likely outturn is for low single-digit total returns in 2008.

Rental growth is a fundamental driver of property returns and for this reason the property consultants say they are comforted by the fact that that the balance between supply and demand in the Dublin office sector is being kept in check. They say that prime headline rents in the Dublin office sector have remained very stable in recent months and there would appear to be no threat of a decline in prime rental values in the medium term, although lease terms could become more flexible as economic conditions weaken.

For Further Information, please contact

Marie Hunt
Director of Research
CB Richard Ellis
Tel + 353 1 6185543
Email - marie.hunt@cbre.com
Mobile - + 353 87 2727115

Dublin Office Market View Q1 2008
Dublin Office Market View Q1 2008