Take-up of office rental space has increased by 40 per cent on 2009 as landlords offer reduced rents and incentives, writes JACK FAGAN
THE BELEAGUERED commercial property market has thrown up a few surprises this year, nowhere more than in the office sector. Take-up of space in 2010 is now on track to reach almost 111,480sq m (1.2 million sq ft) – an impressive 40 per cent increase on the previous 12 months.
The extent of the recovery is all the more surprising as the vast majority of the lettings have been relatively small (92 to 464sq m/1,000 to 5,000sq ft) because of the economic slowdown and the banking crisis.
Most companies moving into new offices have been careful to book the precise volume of space they need and no more. The days of taking an option on extra offices to allow the company to expand seem to be well and truly over. A recent study has shown that a substantial number of business firms are now stuck with surplus space that they cannot offload.
While there will be considerable satisfaction with the level of lettings, developers and investors will not have been too happy with the sharp fall-off in rents. Prime city centre rents in Dublin which hit almost €700 per sq m (€65 per sq ft) a little over two years ago are now back to between €344 and €376 per sq m (€32 and€35 per sq ft).
Worse still for landlords, they have only managed to secure what are disappointing rents by offering attractive inducement packages that frequently equated to 12-18 months rent free. On top of that most leases now have five yearly break options. And the dubious practice of landlords funding fit-outs as a further incentive is set to be dropped as neither the banks nor Nama are expected to give their approval for this extra concession. A rent free period will in future be the preferred option though this is unlikely to have much appeal to companies reluctant to spend part of their financial reserves on fit-outs. The range of concessions to tenants over the past two years has meant that in real terms prime rents have dropped to the mid €20s per sq ft – a level they have not been at for 15 years.
The dramatic fall in rents has meant that many companies which previously could not have afforded anything better than the middle range of office accommodation are now in superior offices in some of the best city centre locations.
Office specialist Declan O’Reilly of agents HT Meagher O’Reilly says that the “up-and-down” rent reviews have encouraged many tenants to commit to longer term leases. When the market recovers in due course, he says it will mean that deals which were structured by developers and occupiers at artificially high rents and capitalised into high property values will become a thing of the past. “These deals worked by effectively giving the occupier a slice of the value through a longer rent free period or capital contribution. Under this arrangement, the rent could not be reduced so as to protect the capital value of the building. This type of contractual arrangement is no longer possible and in due course it will impact on how buildings are funded once occupiers can no longer share in the profit pot.”
Though the overall vacancy rate in the Dublin area remains stubbornly high at around 23 per cent, there are only four office blocks available in the city with more than 9,290sq m (100,000sq ft). These are Montevetro at Grand Canal Dock (19,340sq m/208,184sq ft); 5 Grand Canal Square (11,204sq m/120,609sq ft) and Burlington Plaza 1 (15,285sq m/164,534sq ft). Once these buildings are leased – and they are all the subject of current negotiation in whole or in part – then companies looking for a large block in the city may have to settle for a second-hand facility such as the former Bank of Ireland headquarters on Baggot Street which is in need of considerable refurbishment and upgrading. In most cases, tenants in search of large new city offices will probably have to enter into a pre-letting agreement with a developer or Nama at a rent which will provide an economic return. Current rents would not justify expenditure on a new block or a modern fit out of a second hand building so inevitably rents will have to start moving up again. For smaller buildings it is quite a different story as there are any number of “unlettable” blocks throughout Dublin, some of them previously occupied by State or semi-State companies and now in rag order. In many cases owners have dropped the rents to a fraction of what they were during the boom years in the hope of getting them occupied again and re-establishing a cash flow.
Owners of some of these dated edifices should take note of how the Irish Airline Pension Fund recently handled the challenge of how to hold on to its ESB tenant when the lease expired on Clanwilliam House off lower Mount Street, Dublin 2. It dropped the rent on the 3,716sq m (40,00sq ft) building from 398 per sq m (€37 per sq ft) to around €161 per sqm €15 per sq ft) and signed a new lease. The tenant in this case was happy to settle for a much-reduced rent and stayed. In many other instances, occupiers are using break options and the termination of leases to move to more modern accommodation at comparable or lower rents.
With about half a dozen office developments to be substantially completed in Dublin by the end of the year, construction activity is rapidly coming to an end. It will not start up again while bank funding is restricted and rents remain at an uneconomic level.
