MarketReport:The global economic slowdown could begin to affect rents across a range of sectors during 2008 while the credit crunch will probably be felt most strongly in the office sector, particularly in Dublin where the market faces a possible oversupply of space, according to a new analysis of rents.  

The Lisney Rental Indices for February 2008 focuses on results from the final two quarters of 2007 and factors these into its view forward. While the review sees some room for optimism, particularly in the retail sector, overall the market will be overshadowed by the world economic slowdown and the ongoing impact of the sub-prime lending fiasco. The company flagged the risk of sub-prime load defaults and its influence on the Irish market in its last rental indices. This is now working its way through the global economy with growth rates in the US and Europe declining more sharply later in 2007.

In turn, a slowdown was noted here during 2007 with real GDP growth at about 5 per cent down from 2006's 5.7 per cent, the review notes. The decline occurred mostly in the second half of 2007 with Q3 growth at 4.1 per cent compared to Q1 growth of 8.4 per cent.

"One of the big factors behind Ireland's slowdown has been reduced house building activity," the review says. House completions for the year at 78,027 were down 12 per cent on the 88,419 achieved during 2006. This was offset to a degree by more activity in office building, with 252,543sq m (2.718 million sq ft) under construction during 2007 compared to 109,662sq m (1.18 million sq ft) for 2006, a jump of 130 per cent.

There were also some major retail completions during the year, but in the face of declining consumer activity 2008 still has the potential to be a difficult year, the report suggests. "Certainly, with a slowing economy, with the possibility of global retrenchment in the financial services industry (which accounted for 45 per cent of Dublin office take-up in 2007), and with weakening retail sales, a question mark hangs over the market's immediate ability to absorb further commercial building on the scale of 2007."

Some relief was provided by the US Federal Reserve through a drop in interest rates. While this has yet to work its way through in the euro zone, it puts pressure on the European Central Bank to also cut rates, the report suggests. Any change is unlikely to be seen before the summer at the earliest.

While the decline began to show during the second half of 2007, overall rents continued to increase during the period, the report indicates. Increases of 3.94 per cent and 0.86 per cent in commercial property rents were seen during Q3 and Q4 respectively. Retail was the leader in the sector with an annual increase of 8.84 per cent and industrial rents saw an increase of 5.08 per cent.

Office rents were "stagnant", the report notes, although it only measures headline rents and does not factor in incentives such as rent pauses, inducements that have become common in the difficult market. "Therefore, while measured office rents have shown little movement, there has probably been some growth in net effective rents," the report suggests.

Wage growth and money from SSIAs helped sustain personal consumption and retail rents in 2007, the report says. Most retail sectors have enjoyed growth, but with a general slowdown later in the year. Average Zone A rents in Grafton Street jumped by about 16 per cent to about €11,000 per sq m (€1,022 per sq ft), while Henry Street rents edged upwards to reach about €6,500 per sq m (€603.85 per sq ft).

The office sector presented a significantly different picture. Demand for office space remained high, but "despite this office rents were stagnant with no movement in any of the Dublin sub-markets during the second half of 2007", the report says.

It puts this down to the amount of new supply added to the market during the year. New build increased by 130 per cent, with the rise compared to 2006 almost enough to absorb the 2007 take-up of 299,000sq m (3.218 million sq ft). This held vacancy rates in place, with very little downward movement.

This is almost certain to be repeated during 2008, with 454,559sq m (4.893 million sq ft) of office space under construction in Dublin and 310,000sq m (3.337 million sq ft) likely to be completed during 2008. "With take-up set to slow to 200,000sq m next year due to a cooling economy and a global slowdown in financial services activity, we may begin to see rents for non-prime stock start to decline during 2008," the report concludes.

In contrast, the industrial sector has managed so far to weather the economic slowdown, buoyed by a 16.3 per cent increase in manufacturing production during the 11 months to November 2007, CSO statistics indicate. Manufacturing employment also rose, with the result that industrial rental growth over the year achieved 5.1 per cent.