New Stock and International Occupiers drive Office Market Recovery

A combination of new supply, the return of international occupiers, and growth in office-based employment is helping drive recovery in the office market, according to the latest Q3 2021 office market report from BNP Paribas Real Estate Ireland. (BNPPRE)

Q3 2021 Office Market Trends:

  • Record growth in office-based employment
  • 43,000 sqm of Dublin office take-up; strongest Q3 since 2018
  • Return of international occupiers, deal-sizes increasing
  • 55,000 sqm of new stock delivered
  • Prime rents have edged lower

Occupiers took 43,151 sqm of Dublin office space in Q3 this year, the BNPPRE report outlines, representing a 162% uplift on Q2.   Given sluggish activity in the first half of the year, this is not totally unexpected.  But, perhaps more surprisingly, Q3 2021 was the busiest third quarter since 2018, with take-up levels 20% above the long-run Q3 average. 

BNPPRE was involved in the two biggest deals of the quarter, providing tenant representation services to both BNP Paribas Bank and to Accenture, for new Dublin offices at Termini in Sandyford and in Building 10, Cherrywood Business Park, respectively.

A resurgence in demand and take-up in the office market is now very much apparent, according to Kenneth Rouse, Managing Director and Head of Capital Markets at BNP Paribas Real Estate.

Dublin’s new and refurbished contemporary office buildings are prime assets with larger footprints, the highest technology and sustainability accreditations, and excellent transport links.  BNPPRE is again very active on behalf of occupiers and investors, and anticipates the sector’s return as a top-performing asset class in the short-term”.

Factors contributing to the pick-up include how well Ireland’s economy has rebounded from the Covid shock, report editor John McCartney, Director of Research at BNPPRE, says

“In Dublin alone, 13,300 net additional jobs were created in traditional office-based sectors, the strongest quarterly total ever recorded.  Secondly, the easing of travel restrictions has enabled occupiers to get out and view properties again, helping to un-freeze pent-up demand”. 

International Activity

Eased travel restrictions, increased economic activity and improved confidence have all led to a return of overseas occupiers, who accounted for 70% of the office space taken-up in Q3, Keith O’Neill, BNPPRE Executive Director and Head of Office Agency, said at the announcement of the property advisors’ Q3 office market report this week.

International leasing activity rebounded in Q3, increasing the average deal size with it.  Overseas occupiers represented two-thirds of the market between 2017-2019.  However, as Covid set-in, their share of the market steadily declined through 2020 and Q1 2021”. 

Subdued overseas take-up during the Covid period dragged-down the average deal size too, O’Neill explained. 

International occupiers tend to be larger, with space averaging 1,842 sqm per letting, compared with 859 sqm for domestic office tenants over the last five years”.   

Resumption of international activity has reversed a downward trend, the Q3 office report reads, and the average letting picked-up from 430 sqm in H1 to 830 sqm in quarter three.   There were nine transactions of over 2,000 sqm in Q3.  BNP Paribas Real Estate acted for the tenant in the largest deal of the quarter, which was a 4,066 sqm letting at Termini in Sandyford, County Dublin. 

Sectoral Shake-Up

The retreat and reappearance of international occupiers was also reflected in the sectoral composition of office take-up during Covid.  Multinationals have taken 853,000 sqm of office space in Dublin since 2017, and 69% of this has been consumed by tech firms.  With reduced international activity, the TMT share of take-up declined, while domestically orientated public and professional services sectors assumed a greater share.  However, as the international business space users have come back, tech firms are already reclaiming a bigger share of lettings. 

New Supply

Despite a protracted construction shut-down, and more recent reports of supply-chain issues, 2021 has been a strong year for actual office supply, the BNPPRE report details. 

55,000 sqm of new space was completed in Q3.  This took the YTD total to almost 140,000 sqm; already about 15% more than the full-year figure for 2020.  With several large buildings scheduled to complete before year-end, 2021 could match or surpass the cycle-high of 190,000 sqm supply, Keith O’Neill confirmed.

Estimates are that approximately 60% of this space is already let, however.  And, while this is reassuring for developers of new, energy-efficient offices, both investors and developers working to long lead-times must be cognisant that pre-lets still impact overall market vacancy, if occupiers are moving from older buildings”. 

The office market has seen its vacancy rate upped from 9.1% to around 10.7% since January this year.  With net absorption facing a headwind from sluggish H1 lettings, and with a strong flow of construction deliveries, the BNP Paribas Real Estate view is that the tone of prime headline rents has softened by approximately 5.5% since the start of the year. 

Remote Working Uncertainty

Looking ahead, uncertainty remains about how remote-working may impact the relationship between service sector employment and office space requirements. 

Indecisiveness and mixed messages on remote working guidance and the phased return to offices is disrupting business planning for many, Keith O’Neill, Head of Office Agency at BNPPRE, says.

Clarity from NPHET and the Government on what a safe return to office workplaces would look like, and when this is realistically likely to be possible, would certainly help jump-start the Covid-induced market slow-down in office space.”

According to John McCartney, Director of Research at BNPPRE, the true impact of hybrid-working will not be known for some time.

However, what we can say with confidence is that, independent of other influences, Ireland’s rapid economic rebound and certainty on the Corporation Tax rate should support office demand”. 

Corporate Tax Certainty

McCartney notes that positive news-flow across multiple indicators has caused economists to sharply revise their growth forecasts upwards, and 600,000 net additional jobs are now expected to be created over the 2020-2025 period.  

He also says Ireland’s signing-up to the OECD international tax agreement in October “puts-to-bed a niggling source of uncertainty” and represents the best available outcome for Ireland’s economy and the Dublin office market. 

The OECD corporate tax agreement is now likely to be implemented in 2023 and will provide certainty for the Government in formulating its long term FDI strategy, and for the Dublin office market which serves the multinational sector.

The creation of more than 13,000 office jobs in Q3 alone recoups most of the jobs lost through Covid, the BNPPRE report outlines, and restores employment in Dublin’s office-based industries to within 1.5% of its all-time-high. 

Rapid employment growth provides the best possible starting point for office market recovery, and creates headroom to cope with any movement in the space-per-employee ratio too”, John McCartney says. 

BNP Paribas Real Estate Ireland
BNP Paribas Real Estate Ireland