MarketReport:The office sector is enjoying its strongest performance since 2000, according to new research. Over 55,000sq m (592,000sq ft) of office space was let in the first quarter, most of the deals on 20 and 25-year terms.

Yet while the retail and industrial sectors are strong, there has been a significant downturn in the housing market during Q1 2007, according to the Q1 Dublin Office Market Bulletin from CB Richard Ellis.

The new homes market has turned around completely, says the report. "No-one anticipated the negative impact that political interference and unfounded negative commentary in the media in recent weeks would have on sentiment and confidence levels. We are now in a situation where all the fundamentals that have been supporting the Irish housing market for the last decade are still intact but the pace of buying activity has essentially halved as a result of nervousness and uncertainty. Against this backdrop, prices have essentially remained static since last summer. It is important to stress that houses are still selling well where the developer calls the price right and presents a good quality product with show units."

A result of this change is that first-time buyers dominate the market, with investor interest falling back. Rents and yields are nudging upwards, but investors are backing off because of uncertainty over longer term capital appreciation prospects.

The star of first quarter is offices. Demand is at an all-time high in the Dublin office market, with letting activity up 31 per cent year-on-year.

Market drivers include both local and overseas occupiers who continue to make expansion and re-location decisions against a positive economic backdrop. As much as 48 per cent of office lettings in Dublin in Q1 2007 comprised international occupiers with indigenous occupiers accounting for the remainder. Business services tenants accounted for two-thirds of take-up - the public sector 13 per cent.

Over half of lettings were in D2/D4 and docklands. Another 36 per cent was targeted towards the suburbs. The overall vacancy rate for offices in Dublin is now 10.6 per cent compared to 11.1 per cent a year ago, says Marie Hunt, director of research at CB Richard Ellis. The vacancy rate is declining slowly given new stock on the market. "That said, the vacancy rate in the D2/D4 market stands at a much healthier 5.7 per cent, which explains the increase in rental values in this district in recent months."

Prime rents in the D2/D4 and docklands region have increased from €645 per sq m (€60 per sq ft) to €673 per sq m (€63 per sq ft) since Christmas and look likely to hit €700 per sq m (€65 per sq ft) this year, says James Mulhall, director of office agency at the company.

Retail is performing well on the back of solid consumer spending. Yet retailers have been fighting strongly against rent increases, with some deciding to sell off leases given high costs, the report notes. "There is also evidence that retailers in high streets in provincial locations are finding it difficult to increase sales sufficiently in order to pay headline rents, despite strong trading conditions."

But retail will perform strongly in the months ahead. "However, it would appear that the pace of rental appreciation will be much tamer going forward and schemes that quote realistic rents will undoubtedly fare best in this environment," according to the report.

With vacancy levels in single digits, capital and rental values are edging up in prime locations in Dublin, primarily along the main arterial routes. "While there have been a number of job losses in recent weeks, there is strong demand for the vacated industrial units, either from single occupiers or from developers," the report notes.

Prime industrial rents range from €106-€124 per sq m (€10-€11.5 per sq ft) while capital values of €2,152 per sq m (€200 per sq ft) are being achieved for units of 1,000-3,800sq m (10,764-40,903sq ft).

CB Richard Ellis says industrials will perform at a steady pace over the coming months.

Irish commercial property produced an un-geared total return of 27.2 per cent in 2006 with offices performing strongest at 27.6 per cent, followed by retail at 26.7 per cent and industrial at 25.4 per cent. "Whilst investors realise that these returns were largely as a result of noticeable yield compression and that similar levels of return are unlikely in 2007, the weight of money chasing property continues unabated," the report notes.

Even so, last year's record spend of €3.3 billion is unlikely to be matched in 2007, unless some large forward-funding transactions occur. Although yields have contracted sharply, property is attractively priced against bonds in the long-run context.

"We expect prime yields in Ireland to remain relatively static during 2007 other than in some secondary locations where some upward pressure might materialise."