NEW RESEARCH by economist Dr John McCartney of the Central Statistics Office shows that the natural vacancy rate (NVR) for Dublin office space is 15 per cent – more than twice the 7 per cent level that was previously assumed.

This finding will be seen as positive news for developers, property investors, NAMA and the banks because it means that rents are set to stop falling sooner than had previously been expected. Nonetheless the study, which was presented last night to the Statistical and Social Inquiry Society of Ireland, indicates that a widespread recovery in real office rents is unlikely to materialise before 2014.

McCartney said that with 23.1 per cent of Dublin’s office space currently unlet, rents declined by 28.8 per cent in the year to June. Theory suggested that rents would continue falling until the actual vacancy rate has been reduced into line with the natural vacancy rate – the vacancy rate that was consistent with market equilibrium. Previously it was assumed that the natural vacancy rate in Dublin was around 7 per cent. However, McCartney’s paper rejects this rule of thumb and statistically estimates the true natural vacancy rate at 14.98 per cent.

According to McCartney, this profoundly alters the outlook for Dublin office rents. “For a given annual consumption of office space, the gap between the current vacancy rate and the natural vacancy rate will be closed more quickly if the NVR is 15 per cent than if it were 7 per cent. All else equal, this suggests an earlier recovery than had previously been expected. In simple terms, the market is less overbuilt than we thought.”

Despite this, however, McCartney warns that Dublin office rents will continue to decline – albeit at a reduced rate-for the next few years.