The shortage of top grade office accommodation in Dublin’s commercial property market as demand rises, helps to explain why rents there are soaring. Aercap, the world’s largest aircraft leasing company, has set a new benchmark for the sector, with its purchase of a 25 year lease on a new six-storey office development at the junction of St Stephen’s Green and Earlsfort Terrace. The company has paid a record high rent for a building that has yet to be completed. In consequence, rents for high quality office accommodation in the city centre are expected to rise further, as leases fall due for periodic review and renewal.
The increasing imbalance between demand for and supply of quality office space, which is pushing up rental costs, is unlikely to change much, at least in the short-term. There is little new supply coming on stream, as construction activity remains depressed. And there is very little vacant accommodation now available to rent. The domestic banks between 2004 and 2008 were the main sources of funding for the commercial property market. But they no longer perform that role. Reckless lending by the banks to the property sector has now been replaced by risk aversion. And the private syndicates of wealthy investors, who relied on bank financing to fuel the boom and bust property cycle, no longer operate.
Foreign institutional investors, such as Blackstone and Kennedy Wilson, have acquired some valuable property assets in key locations, from which they have profited, while the establishment of real estate investment trusts (REITs) - which enable individuals to invest in commercial property via the stock market - has helped to broaden the property market. However, with commercial rents in prime locations rising rapidly, but with little new construction under way to meet increased demand, the risk remains of a rapid escalation in commercial property prices. This would both damage national competitiveness, and threaten the pace of economic recovery - something the Government, in framing the 2016 budget, should bear in mind.