New analysis of the office market in Dublin’s central business district (CBD) highlights how near-record low vacancy rates are placing strong upward pressure on rents.
Leasing activity in 2014 hit its highest level since 2007, according to the DTZ Sherry FitzGerald report, with more than 100,000sq m of take-up recorded – double the five-year annual average.
The imbalance between supply and demand led to a “remarkable 49 per cent rise in rental values” during 2014 as the level of floor-space transacted was up 78 per cent on 2013.
"2014 saw demand for grade A space run ahead of supply for the first time on record," said Marian Finnegan of DTZ.
“Tenant demand remained firmly focused on grade A accommodation which saw demand hitting a high of 83,850sq m at the end of December. This equates to about 82 per cent of overall take-up in the CBD, thus illustrating occupiers’ preference for best-in- class accommodation.
“Grade A take-up will be constrained going forward as the stock of available space continues to shrink rapidly in the CBD. At the end of December, net available grade A space declined to a record low of just 42,850sq m – but 66 per cent of this space is either signed or reserved,” said Ms Finnegan.
“As such, the net available grade A1 space is just 15,750sq m in the CBD. Together with the limited development pipeline in 2015 and strengthening demand, the CBD market is fast approaching a tipping point.”
The IT and telecommunications sector is the dominant source of demand for office space, DTZ said. This sector increased its share of activity in the CBD to 37 per cent in 2014 from 20 per cent in 2013.
Following a prolonged period of decline, banking and finance saw a notable increase in demand for CBD office space in 2014 – this sector accounted for 17 per cent of total activity last year. Meanwhile, the more traditional CBD occupants – such as legal firms, accountants and business service organisations – accounted for 20 per cent of activity.
The most popular letting area in the CBD over 2014 was the south docks, where the supply of available space dropped by more than 63 per cent to stand at just 13,500sq m.
“Supply levels in the south docks are critically low, with a present net vacancy rate of 4.1 per cent, the lowest of all the CBD areas,” said Ms Finnegan.
“To put it into perspective, take-up in the south docks stood at 34,550sq m in 2014 with average take-up in the current cycle standing at around 23,000sq m per annum. The area is expected to witness further upward pressure in rents in 2015. A similar situation exists in the traditional core area, where supply levels declined to 48,350sq m and the corresponding net vacancy rate to 6.7 per cent, sub the 7 per cent benchmark rate which traditionally indicates a shift towards a landlords’ market.”
Prime headline rents in the CBD stood at €520 per sq m at the end of December, meaning they are now just 16 per cent below peak levels recorded at €619 per sq m. DTZ says rising demand and constrained supply in the CBD will see rents rising to €580 per sq m by 2017.
The total quantity of available space in the CBD has been steadily diminishing over the past four years. Supply levels peaked in 2010 at 288,752 sq m and have declined year on year with a record fall in availability recorded in 2014, when supply dropped to 155,450sq m. The corresponding vacancy rate declined to 9.1 per cent during the 12-month period.
