The case for refurbishing secondary office accomodation in Dublin
Almost two thirds of Dublin’s office stock was built more than 10 years ago
Dublin, July 25th 2012 – Property consultants CBRE today released an interesting topic paper exploring the issue of obsolescence and the merits of refurbishing older office accommodation in the Dublin market as opposed to developing new buildings.
According to the report, the issues of depreciation and obsolescence have recently become more relevant for owners of Dublin office buildings. No new office buildings have been developed in Dublin for the last two years and the scarcity of funding and general economic climate has meant that landlords have not been as focussed on the upkeep and maintenance of their office properties as they might otherwise have been. In addition, many office buildings are in the hands of receivers, financial institutions and NAMA and decisions to invest in the upkeep and maintenance of these buildings has in some cases not been a priority. CBRE say that quite apart from trying to attract new occupiers and investors, it has become difficult for some landlords to retain existing tenants in office buildings that have not been appropriately maintained and have started to deteriorate.
According to Willie Dowling, Head of Office Agency at CBRE, Dublin, “Over time, all office buildings physically deteriorate and become either physically or functionally obsolescent to some degree. In a normal functioning market, the owners of these buildings invest in a rolling programme of maintenance and upgrade works to preserve the functionality and value of the buildings over time. Considering the impact of the financial crisis on the Irish commercial property sector over the last five years, investment in the maintenance and improvement of buildings has been less than would otherwise have been the case. Many office buildings in Dublin are now in desperate need of refurbishment with some buildings ripe for redevelopment. However, refurbishment is likely to be a more practical and cost effective solution than redevelopment in the Dublin market in the short to medium term. This is not to say that there is a case for refurbishing all secondary office buildings. There is unfortunately no ‘one size fits all’ solution and every property will have to be assessed in its own right to determine the best course of action for that particular asset.”
Almost two thirds of Dublin’s existing office stock was built more than 10 years ago and is now facing some physical and/or functional obsolescence.
Although there are clearly signs of scarcity emerging in some sectors of the Dublin office market as highlighted in recent weeks by the IDA, there is little prospect of new speculative office development occurring in the Irish capital until such time as rental values increase by at least 20% from current levels to render development economically viable.
The cost benefit analysis for refurbishing secondary office stock will vary in each instance. Every office property will have to be assessed in its own right to determine if the benefits of refurbishment outweigh the costs of upgrading the accommodation.
The lack of new office development in Dublin at present has raised the likelihood of Grade A supply shortages over the next 12 -24 months. There are currently only 6 office buildings of more than 7,000m2 available to let in Dublin 2/4. 2 of these buildings, Cumberland House in Dublin 2 and Burlington House in Dublin 4 are classed as secondary buildings leaving only 4 possible options for occupiers wanting to locate a large number of employees in a new Grade A building in a Dublin 2/4 location.
Refurbishment is likely to be a more viable and more cost-effective alternative to complete redevelopment in the Dublin office market in the short to medium term. Although it is difficult to foresee speculative office development occurring in the capital any time soon, in cases where landlords have carried out cost benefit studies which justify the expenditure, a notable increase in office refurbishment projects can be expected, particularly in the traditional Central Business District of Dublin over the next 12-24 months.
We may also see other properties which are currently in alternative uses in prime locations being converted for office use, as has been he experience in many other European cities over the last number of years
All refurbishment has the potential to sustain and hopefully improve the rental value of the underlying asset as well as improving the yield that an investor would pay for the property although the extent to which this occurs will ultimately be dictated by the quantum and quality of refurbishment undertaken.
In some cases, refurbishment may not dramatically impact the level of rent achievable. It could however be the difference between letting or selling the building and generating an income or leaving it sitting vacant and deteriorating further.
Doing nothing and allowing buildings to deteriorate further is just not an option for many landlords, particularly where buildings are contravening building control, fire safety, health and safety and other legislative directives including sustainability and environmental initiatives.
In some cases, minor cosmetic improvements such as cutting the grass, removing the weeds, replacing signage and painting the building can significantly boost the letting prospects of the premises and be enough to satisfy a tenant. The physical appearance of the building can certainly be the difference between a potential occupier’s decision to view the building or to disregard it, regardless of the rental terms on offer.
A promise to refurbish or incur expenditure at a later date will do little to appease a tenant who is threatening to leave an office building. It generally won’t be enough to attract new tenants in the current climate either with occupiers wanting works completed in advance of committing to lease premises.
The Government could become champions on refurbishment, bringing their own office properties up to the latest standards of energy efficiency and modern specification and improving their letting and sale prospects.
The Government should investigate the introduction of tax relief akin to the Business Premises Renovation Allowance which has been so effective at stimulating refurbishment projects in the UK and Northern Ireland. This could be the catalyst for the creation of thousands of jobs at a time when this is clearly necessary. There are thousands of construction workers in need of work in the Irish economy at present that would benefit from a move to retrofitting accommodation, which is labour intensive. The net result would be an improvement in the availability of the type and quality of office stock required to continue attracting multinational occupiers and employers to the country.
According to Marie Hunt, Executive Director and Head of Research at CBRE in Ireland, one of the authors of the paper “There is now a window of opportunity for the owners of some well-located secondary office buildings in Dublin to refurbish ageing assets in order to improve their attractiveness and increase their letting prospects, boost their rental value potential and ultimately improve their value. Ageing properties in the best Dublin 2/4 locations are obviously going to demonstrate the best case for refurbishment. If undertaken properly, refurbishment (minor or major) can provide improved returns for property owners over the longer term. However, in some cases, considerable outlay on refurbishment may make little or no material impact on the rental or capital value that can be generated from the asset. It may however be the difference between being able to let the building relatively quickly or having it sit vacant for a prolonged period of time”.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services firm (in terms of 2011 revenue). The Company has approximately 34,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
In Ireland, with offices in Dublin and Belfast, CBRE is the country’s largest commercial real estate services company, now employing over 110 employees and offering a full range of property services including property sales and acquisitions, leasing and management, investment, corporate services, debt advisory, project management, consultancy, valuations and research. Please visit our website at www.cbre.ie or www.cbre.ie/ni.