Despite significant challenges presented by the ongoing COVID-19 pandemic, 107 office deals were completed in Dublin in 2020, with more than half of these transacting in the latter half of the year.
A total of 26,413 sq.m was leased during the final three months of 2020, bringing full-year take-up to 161,538 sq.m, a 48% decline on the 2019 total. After a bumper Q1, office leasing activity fell to the lowest level on record during Q2 as the full impact of the lockdown was felt. Encouragingly, however, take-up has been increasing steadily each quarter since then with a number of large deals in progress as we move into 2021.
The largest letting of the year saw Mastercard agree to lease 23,148 sq.m at One and Two South County, Sandyford, Dublin 18, in a deal negotiated by BNP Paribas Real Estate. One South County was completed in 2019 with Two South County due to reach practical completion later this year.
The TMT sector was again the top performer, accounting for 72% of total take-up across 31 deals. This includes lettings to Microsoft and Amazon in the last six months, with both clearly in expansion mode and committed to the Dublin office market longer-term despite the pandemic. Amazon signed for 7,036 sq.m at 2 Burlington Plaza, Dublin 4, while Microsoft, who have based operations in Sandyford since entering the Irish market in 1999, leased 4,080 sq.m in the North Docklands at No. 3 Dublin Landings.
Flexibility has become increasingly important to occupiers as they seek to protect themselves and their staff from future unexpected shocks. Despite this, lease lengths held firm in 2020, averaging 9.5 years which is a slight contraction relative to the average of 9.9 years recorded in 2019. The average break option also contracted, but again only marginally, from 6.2 years in 2019 to 6 years in 2020.
At present demand is primarily coming from occupiers in the sub-1,000 sq.m size bracket which accounted for 75% of all deals in 2020. There has also been an increase in so-called ‘grey space’ as existing occupiers offer surplus office space to the market for assignment or sub-lease. We are noting a preference for this fully fitted space, particularly among smaller occupiers who may be seeking to minimise potential fit-out costs from the outset. With the economic fundamentals for Ireland relatively strong, and Brexit continuing to drive activity towards Ireland, the likelihood is that smaller companies will take the best space as it becomes available.
Working from home was necessitated by the pandemic and has been widely adopted and tested by companies during 2020. In most cases it was found to work just fine, with trust between management and employees strengthened and a greater work / life balance provided for some. Despite this, the benefits of a physical workspace separate to home were missed, with many employees opting to return to the office as restrictions were eased during the summer months. The recent increase in lettings and enquiries also indicates that companies still recognise the benefit of having a physical office location.
While it is too soon to say how this will balance out, we expect that the future of the office market will see a combination of remote and office-based work as opposed to one or the other. Remote working full time can lead to isolation and communication issues, which can negatively affect mental health, productivity and innovation. The office provides a place for employees to meet and work together, so the design of offices has been increasingly focused on community, collaboration and culture. These elements are difficult to recreate or support remotely, so we expect the physical office will continue to be a driver of business success in the post-pandemic world.
On a positive note, Ireland has continued to punch above its weight in terms of attracting foreign direct investment, with IDA Ireland recently reporting that more than 20,000 new jobs were created by IDA-supported companies in 2020. In the Dublin office market, overseas companies accounted for 81% of total take-up with global TMT and Health & Pharma companies predominating. This demonstrates the resilience of the FDI sector during an otherwise challenging year for business. As vaccination programmes are now being rolled out in Ireland and across the globe, we expect that larger FDI requirements may emerge in H2 creating a more buoyant market for 2021 and beyond.
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