Fears that the slowdown in the US economy would prove to be the death knell for the Celtic Tiger - and as a consequence the Irish property market - are unfounded, according to a report on the Dublin office market by DTZ Sherry FitzGerald Research.
Activity levels in the Dublin office market were inevitably impacted upon by the slowdown in the US economy during the first three months of the year, however. The most direct impact of the slowdown was manifested in market confidence, with some firms adopting a "wait and see" approach, thereby placing expansionary plans on hold.
The total stock of office accommodation rose during the quarter to reach almost 20.45 million sq ft, while the quantity of available office space increased to 1.48 million sq ft. The resulting vacancy rate rose to 7.3 per cent, and while this increase is significant, it is worth noting that approximately 20 per cent of the available space was reserved at the end of the quarter - suggesting a true vacancy rate of 5.8 per cent.
The majority of the available space, 71 per cent, is third generation suburban, reflecting the recent increase in construction activity in suburban locations.
The report indicated that the quantity of office accommodation under construction dropped slightly in the first three months of 2001 to reach 3.8 million sq ft.
The majority of this space is, as anticipated, located in the suburbs - while just over a quarter of it is located in the prime market of Dublin 2 and 4. Almost 20 per cent of the space under construction is pre-let, while a further 18 per cent is reserved.
A regional analysis of construction activity reveals that the majority of secondary accommodation is either pre-let or reserved, while a relatively low proportion of prime accommodation is either pre-let or reserved.
These disparities, however, can be explained by differences in the period of time the accommodation is under construction. In particular, 67 per cent of all space that has been under construction for over 12 months is either pre-let or reserved. In contrast, only 4 per cent of accommodation under construction for a period of less than three months is either reserved or pre-let.
A regional breakdown in the report reveals that the majority of secondary accommodation has been under construction in locations such as Talbot Street and Parkgate Street for nine months or longer. On the other hand, the office space in the prime market has been under construction for a relatively short period. Interestingly, despite the much discussed slowdown in the technology sector, IT and communications firms occupied the majority - 73 per cent - of space taken up during the first three months of the year. The figure for the corresponding period last year was only 46 per cent.
While the share of accommodation taken up by the IT and communications sector has increased, that occupied by the financial sector dropped to only 2 per cent in the first quarter of 2001. This compared with 22 per cent in the same period last year. Interestingly, IT firms alone are responsible for 43 per cent of all space taken up.
Rapid acceleration in rental levels - a feature of the market for the past number of years - has slowed, with a clear stabilisation in rental levels across all sectors of the office market during the quarter. This is positive news for the relative competitiveness of the Dublin market, in a European environment where it now ranks in sixth position, with prime office rents of #546 per sq m (£40 per sq ft).
The central business district of London significantly surpasses all other cities, with rents of #1,028 per sq m (£75 per sq ft) ranking London as the most expensive European city. This is followed by Paris, with rents of #762 per sq m (£56 per sq ft).
Following the strong performance of the Irish economy and property market during 2000, the outlook for 2001 and 2002 is more modest - and perhaps more uncertain. The uncertainty is due mainly to the impact of a slowing US economy.
However, given the swiftness of the monetary response to the economic slowdown in the US, it is reasonable to assume that the US economy will experience a soft landing, with a recovery commencing in the latter months of 2001 or early 2002.
DTZ Sherry FitzGerald says employment growth is expected to slow during this year, largely driven by a slowdown in labour force growth rather than the wider economic environment. Unemployment levels are forecast to continue to decline, a real indicator of the underlying strength of the economy.
The much-discussed slowdown in the technology sector has already resulted in the postponement of expansion plans for some companies, and a limited level of job losses. This is unlikely to accelerate given the limited proportion of high-tech Irish exports destined for the US market. It is important to note that without a significant fall in European demand in the high-tech sector, the impact on Ireland will be modest.
Furthermore, on the assumption that the US economy would begin to recover by the end of 2001, it had been anticipated that that there would be an increase in market confidence, which would be further underwritten by any reduction in interest rates in the months ahead.
As confidence levels rise it has been expected that there would be an increase in activity levels in the office market as expansionary plans postponed during the early months of this year are renewed. The stabilisation of rental levels, a feature of the market during the first quarter, should continue - with limited rental inflation anticipated during the coming months.
Finally, as the year progresses, it is anticipated that the proportion of accommodation under construction which is either prelet or reserved will increase, as the schemes become more advanced.
