While there is a full pipeline of development in the wings, much of this is unlikely to be built without pre-lets in place. That should prevent the office market from any major oversupply in the medium term
The Dublin office occupier market has returned to pre-crash leasing activity levels, but with one important difference: some 55 per cent of all stock due to be delivered in 2018 is already reserved.
While there is a full pipeline of development in the wings, much of this is unlikely to be built without pre-lets in place. That should prevent the office market from any major oversupply in the medium term.
Prime rents in the central business district (CBD) are €55 to €65 per square foot based on recent transactional evidence. While analysts differ on a precise vacancy rate, it is likely to be in the region of 11 per cent in the CBD and 14 per cent overall.
The technology sector accounted for about half of the take-up in the last quarter of 2017 followed by financial services and the re-emergence of the public sector.
Our current buoyant and stable economy, coupled with record unemployment, is likely to mean sustained demand from domestic and international occupiers.
With rising city-centre rents and improving public transport links, occupiers are looking at various options when planning and budgeting for their future requirements.
Many businesses are keen to keep a presence in the city centre, but are happy for certain services to be out of town. The Luas cross-city line has opened access to a broader employee base for many south Dublin office locations.
Good-quality, affordable rental accommodation remains in high demand. Access to the city centre and to a greater network of employees are driving some occupier decisions.
Many large occupiers will also look to take space on an individual, ad hoc project basis for typically 12 to 36 months. The emergence of new, good-quality, well-located and increasingly trendy serviced offices has given these companies a real choice that has not been seen in a Dublin context before. It is a trend that is likely to continue.
Current research suggests that this will not negate the need for office space in the future, but rather change its layout and specification.
Changes in work practices such as hot desking/flexible working hours offer occupiers potential savings in terms of space required and staff retention. Landlords willing to be creative in terms of lease length and specification may thus win in the competition for occupiers.
Larger floor plates and generous common areas are wanted. This is a way forward in modern work practice. As a cyclist, I also welcome the addition of proper shower facilities and secure bike stores.
Reception areas, the first impression of a building, need to be impressive yet functional. In addition, many corporate occupiers have specific security needs which must be addressed. This means reception areas being designed so that additional security arrangements can be added without taking from the aesthetic.
The market now has upwards/downwards rent reviews. Tenants are mindful of the rental costs over the lease term and not just the initial rent. They often assume this is something they cannot control. While this may be true to a large extent, there are measures that can be taken when negotiating leases with landlords.
Getting advice on lease terms before negotiating final commercial terms is essential. The strong demand from domestic and overseas purchasers for office investment has led to some owner-occupiers considering sale and leasebacks as a way of releasing cash within a sector that has pent-up demand. Many of these opportunities are off-market, allowing occupiers to trade in a private manner if preferred.
Investors need to know what tenants and other investors want, and deliver buildings that meet these needs. Physical flexibility is key. Institutional-type investors are looking for certainty of income and tenure, and will sometimes opt for a multi-let building to spread the risk. This may even be done at the expense of forgoing a AAA covenant who may require a five-year break.
Ensuring that cores are correctly positioned and sufficiently spacious is crucial to achieving a workable multi-let office building. It is clear to see where older buildings are trading for refurbishment potential; those designed with generous common areas fare best.
The attractiveness of densely populated and serviced locations in areas such as south suburban office parks will continue to grow. The establishment of Airport Central at Dublin Airport will assist many locations in north Dublin. Recent investment sales activity at Northern Cross on the Malahide Road proved the current demand for office investment in this location.
Investors should look to Project Ireland 2040 for opportunities across the country. In Dublin, the commitment to a metro system linking Swords and Sandyford may lead to occupiers seeking value to consider areas such as Balbriggan, Malahide, Swords and Santry.
The Dublin office market has many sub-markets and occupiers have diverse needs. Buildings should be positioned with a range of occupiers in mind and leases should reflect what buyers in the investment market want.
The investor landlord is often wearing two hats in this process, attracting the right tenant, negotiating terms the occupier is happy with, while maintaining investment value. Done right, the rewards are there in the current market.
Patricia Ward is a director at TWM with specialist knowledge of the office sector