What next for commercial property?

Offices

Co-working and flexible office space – where companies and individuals rent on a short-term basis – has emerged as a driver of demand and take-up in the Irish market.

“The standout feature in the office market in 2018 will be growth in the number of co-working and flexible space providers,” says Marie Hunt, director of research at CBRE. “Now that WeWork, Iconic Offices and others are here, we expect increased appetite for the flexible office accommodation model.”

James Meagher of Knight Frank estimates that co-working office space accounted for about 6.5 per cent of take-up in 2017 and, while a small share, “it was four times the level in 2016”. With such growth set to continue, he says, the co-working market could account for 10-15 per cent of take-up next year. “This means it will represent a significant disruption to the traditional landlord-tenant model,” he says. “Given an expected increase in co-working enterprises in Dublin next year, the co-working market will become very competitive and the quality of covenant will be extremely important to landlords.”

Paul Finucane of Colliers also believes 2018 will see a “rapid rise” of flexible workspace operators. “Dublin has lagged other global cities when it comes to flexible workspace,” he says. “Until recently, this market comprised local providers operating out of smaller period buildings in the city centre. The real game-changer is the recent announcement that WeWork has taken around 110,000sq ft of space in two Dublin city-centre locations. We expect them to be open for business in the second/third quarter of 2018 and they will offer much-needed flexible space for larger occupiers hoping to avoid long-term leases and expensive fit-outs. We are also aware of two other co-working operators in the market – each looking for around 40,000sq ft – so the flexible space model is here to stay.”

Hibernia REIT is one significant landlord embracing the co-working and flexible trend, which reflects changing patterns in the way we work. Its recently completed 1WML scheme in Dublin’s south docklands has a large ground floor “townhall” area that provides an informal meeting and social space for all occupiers in the building. “This has proved hugely successful and fully embraces the way occupiers now want to work, with more informal meeting/break-out spaces,” says Aisling Tannam, director of Cushman & Wakefield’s Dublin office leasing team. “Next year will be an interesting market for co-working/serviced office providers with increased presence through significant central business district leasing activity.”

Another trend to watch is growth in the number of very large lettings. Hannah Dwyer of JLL points to nine deals so far in 2017 for space in excess of 50,000sq ft – there were just two such deals in 2012. “Anything bigger than 50,000sq ft is considered large for Dublin,” says Dwyer, “with some limited deals greater than 100,000sq ft. But five deals this year were in this larger-size category, which is the same as the combined total for the last three years. We’re expecting more of these deals at the larger-end of the scale in 2018.”

Dwyer points to "strong demand" for large-space requirements from companies like Facebook, AIB, LinkedIn, JP Morgan, Zendesk, Indeed and Google. "The speed at which companies are expanding is rapid, particularly those in the technology sector," she continues. "We are expecting this type of demand to drive activity next year."

Tanya Duffy, a researcher at Lisney, agrees that size will be the “standout” feature of 2018 as “big occupiers will continue to get bigger”. She believes it’s likely that well-known international names will “significantly increase” their presence in Dublin and, as a result, the market will be “dominated by the larger occupiers making big commitments”.

A number of voices in the industry point to Brexit making its presence increasingly felt going forward. “We anticipate further activity as a result of Brexit from international companies looking to establish or grow their operations in Dublin or elsewhere in Ireland,” says Enda Moore of Hooke & MacDonald. “The preference will be for new, high-quality modern accommodation with excellent staff amenities.”

Tony Waters of HWBC says Brexit will “have a bigger impact” on office take-up in 2018 as more banking, insurance and financial services companies “firm up” their post-Brexit plans. “Dublin is expected to win around 15 per cent of any post-Brexit exodus from London and already companies such as XL Insurance, Beazley and KBRA Ratings have announced Dublin as their location of choice – but our housing crisis will impact on some corporate decisions.”

He says the “measured delivery” of new space to the market and the fact that about 90 per cent of buildings completed in 2017 were pre-let means there will be no equilibrium between demand and supply until “beyond 2019”. As a result, the market will “continue to harden” in favour of landlords, especially in Dublin’s central business district where the current wave of construction won’t greatly increase choice for renters.

Waters points to headline rents peaking in 2018 at about €65 per square foot with tenant incentives, like rent-free periods and break options, coming under pressure. Occupier demand, he says, will be “increasingly driven” by domestic and Government requirements but the technology sector will “continue to dominate take-up”. He expects the quantum of space completed next year at about 2.75 million square feet – slightly up on the 2.4 million square feet due for completion in 2017 – but there has been “a slowdown in the pace of new office starts, so 2018 could see the peak of development in this cycle with less coming on line in 2019”.

Retail market

The retail market has recovered somewhat since the crash – mainly in prime areas and the big destination shopping centres – but signs of the sector being seriously disrupted by online sales are starting to emerge.

Aiden McDonnell of Colliers says retail sales are rising at an annual rate (in value terms) of 3.5 per cent and by 5.5 per cent in volume. “But a major factor affecting the market is the galloping influence of online sales. With logistics becoming so sophisticated and delivery times improving, there has been an explosion in online buying in fashion goods, catching up with music, books, and ‘click and collect’ in homewares. The interesting one, however, is the progression in online grocery purchasing.

"More people are having their ordinary grocery goods – washing up liquid, tinned goods, soap powder, cereals, dry goods - delivered. And then, often daily, purchasing their 'tasty morsels' – fresh meat, fish, dairy, bread and fruit and vegetables – during the day in the city or on the way home. This explains the growth in smaller supermarkets – Lidl, Aldi, Tesco Express, M&S Simply Food – trading in both the city and the suburbs."

However, in terms of property, there has been very little addition to Ireland’s retail stock since the crash. But some in the sector think that is about to change. “Shopping-centre development and extensions will pick up pace in 2018 in both Dublin and regional locations,” says Tony Waters of HWBC. “Extensions and refurbishments currently in planning/development include Frascati Shopping Centre in Blackrock, Stillorgan Shopping Centre, Liffey Valley and Blanchardstown in Dublin. Modernisation of Dublin’s city-centre retail landscape will gather pace in 2018, with new retail and food and beverage space being delivered, including Central Plaza on Dame Street and 7-9 Henry Street.”

Nearly all commentators point to growth in “experience” retailing where the tenant mix in shopping centres evolves to include more quality food and drinks space and leisure activities in order to increase the “dwell time” of shoppers and combat online sales. This will mean more visits to the city centre or the leading shopping centres combined with going to a restaurant, theatre or cinema.

The retail market in Dublin city centre, meanwhile, is going to be particularly interesting in 2018, with new retail developments opening and the Luas Cross City line fully operational. James Meagher of Knight Frank says one area to watch is Dawson Street, which will see the "addition of a Luas stop and the opening of high-end retail space at Green Reit's One Molesworth Street while Friends First is also delivering a revamped retail experience along Royal Hibernian Way. Elsewhere, the opening of Central Plaza on Dame Street will act as a significant draw in bringing people into the city centre."

Hannah Dwyer believes prime retail assets will continue “to show stability”, while some secondary and tertiary schemes will perform less-well in terms of demand, vacancies and rents. “We are seeing a consolidation of retailers across the sector and these are focusing on fewer, better-quality units in the best locations, instead of having multiple active requirements,” she says. “With the focus on quality and not quantity, this is having some impact on the secondary part of the market. That said, good quality and actively managed secondary is stable, particularly shopping centres, but it varies significantly on the location, footfall and catchment of the individual scheme or unit.

“The result of this is that we are expecting future rental growth for prime retail, and for some solid secondary assets, however, poor secondary and tertiary retail will be more challenging, with flexibility needed on agreements with retailers, and potentially rental decline.”

Industrial market

This sector has been relatively static over the past few years, with slowly rising rents and values, and a dearth of high-end accommodation which is most in demand. However, as the economy expands and e-commerce grows rapidly, expect the industrial market to show signs of life and even innovation.

Brendan Smyth, director of industrial at Cushman & Wakefield, believes planning for the “urban logistics market of the future” needs to start now. “It is estimated that Dublin city requires approximately 40,000sq m of urban logistics space to serve the growing e-commerce market. Online sales across Europe amount to €232 billion and are forecast to rise by 94 per cent by 2021. The inner-city warehouse of the future may be underground. While some may argue this could be an expensive solution where low profit margins make it difficult to compete, the retail war may be won in a market where customers require speed of delivery and at a time that suits.”

He points out that the cost of urban deliveries is high and that “the majority of industrial solutions are outside of the M50” while high-value land uses are preventing the development of inner-city logistics solutions. “As is evident for anyone regularly crossing Dublin city, congestion is becoming an ever-increasing problem with no obvious solutions in the short to medium term.”

Marie Hunt of CBRE believes Brexit will have a striking impact on the industrial market. “The standout feature in the industrial sector in 2018 will be the move by many retailers and businesses that are currently servicing their Irish businesses out of the UK to move their distribution and ‘last mile’ delivery solutions to Ireland due to uncertainty about the movement of goods post-Brexit. There will be a notable increase in demand for modern logistics facilities, not just in Dublin, but in other key population centres.”

Rent rises over the past 18 months, according to James Meagher of Knight Frank, have made construction viable in certain locations and this will translate into an increase in building starts in 2018. “Allowing for construction delivery times, it will be some time before this increase in activity translates into an easing of the supply shortage,” he says.

Enda Moore of Hooke & MacDonald also sees some movement in the top end of the industrial market in 2018. “As rents for good-quality warehouses continue to grow, due to supply outstripping demand, we expect that demand will continue to rise for design-to-build opportunities due to a shortage of modern, well-located properties,” he says. “Due to the shortage of modern warehouses, we expect prices to rise, which will in turn make it viable for speculative building to remerge.”