Rents for the very best modern offices are rising, but the mainstream market for business space is moving in favour of tenants due to rising vacancy.
The latest report by BNP Paribas Real Estate Ireland (BNPPRE) points to a two-tier market for Dublin office space. Rents for brand new, high-spec buildings in prime locations are now rising again, having been temporarily set-back by Covid-19. However increasing vacancy is dragging on older buildings which represent the majority Dublin’s office stock. As a result, average rents and lease terms are moving in favour of tenants.
The report notes that 45,600 sq m of office space was leased in Q1 2022. This represents a near ten-fold improvement on the Q1 2021 trough, and the overall trend is improving. However take-up remains well down on historical averages. According to John McCartney, Director of Research at BNPPRE, this should not be surprising;
“It is challenging for firms to define their long-term business space needs at the moment. Many are in the process of developing remote-working policies which will ultimately impact on their real estate strategies. Meanwhile they are facing increased uncertainty from the Ukraine war, the ongoing Coronavirus threat, rampant inflation and rising interest rates. In this context it is no surprise that organisations are taking their time before committing to binding lease contracts.”
While leasing remains pedestrian, there has been a surge in office building activity. Over 100,000 sq m of new space has already been delivered since January and around 240,000 sq m is expected in the full year. This will make 2022 the biggest year for Dublin office completions since 2008.
According to Keith O’Neill, Director of Office Agency at BNPPRE;
“Although a significant share of this new space is pre-let, it will provide opportunities for organisations to access well specified, environmentally sustainable accommodation that aligns with modern brand values and ESG requirements.”
Despite surging supply and below-average demand, O’Neill says prime rents are rising;
“Occupier demand is concentrated on new, sustainable offices with the relevant environmental accreditations. Because there are relatively few of these buildings, prime headline rents are edging-up, and we expect more growth as the year progresses.”
However, at the overall market level, BNPPRE says that leasing activity in 2022 is unlikely to fully absorb the additional space being built, meaning that the vacancy rate will rise. This will reduce competition for space in middle-aged and older buildings;
“Vacancy edged-up in the opening months of the year, and this is creating more favourable terms for tenants in the mainstream market, below the top tier of brand new buildings. We expect this trend to continue for the remainder of 2022 and into 2023.”
The report also notes that increased uncertainty is benefiting flex-space providers such as Iconic Offices, Pembroke Hall and Regus, all of whom have recently taken, or are seeking office space to lease-on on flexible terms.
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