OfficeMarket: Strong occupier demand is likely to drive up office rents in the city centre while suburban locations may prove sluggish, writes Gretchen Friemann

Rents in Dublin's city centre could jump sharply this year as expanding corporations continue to drive up demand for new developments.

But the capital's overall vacancy rate will remain in double digits due to continued over-supply in the suburbs.

Over the past 12 months top-line rents have risen to €538 per sq m (€50 per sq ft) from around €484 per sq m (€45 per sq ft) and the more bullish property agents claim this figure will surge as high as €646 per sq m (€60 per sq ft) by the year's end as developers cash in on the race for centrally located, third generation office space.

However, there is concern at the lack of new blood in the market.

Most of the large-scale transactions are coming from established companies rather than new businesses moving into the capital and experts predict there will be no significant impact on the vacancy rate until that market shift happens.

According to an annual survey of the Dublin office sector, which was published by CB Richard Ellis Gunne last week, the vacancy level has fallen to 11.2 per cent from 12.9 per cent at the start of last year.

But a separate report from HWBC puts the figure much higher at 13.61 per cent.

Paul Scannell, a director with the company and the report's author, claims suburbs account for almost half of the overall vacancy rate and he estimates the level in the city centre is closer to 6-7 per cent.

This would put Dublin on a par with London where office rents are among the most expensive in the developed world.

Scannell predicts the "disparity between the city and suburbs" will continue for at least another two years as vast acres of empty office space, constructed on the back of the dot.com boom, gradually become soaked up by businesses priced out of the city centre.

He points out that, although take-up rates in the suburbs remained sluggish in 2005, there were pockets of recovery.

"Sandyford had a noticeable bounce last year with a large amount of leases taken out on buildings that have been vacant for years. A lot of this is down to the completion of the M50 and the green Luas line. Infrastructure really is the key to the suburbs. That's why we're seeing the worst vacancy levels in developments that offer little in the way of public transport."

However, Scannell claims the Government's transport plan should ease the problem, particularly in the northern and western suburbs where vacancy rates remain stubbornly strong.

But other property sources argue new corporate blood is the key to reducing Dublin's high level of empty office space.

While the IDA's success in luring blue-chip IT brand names like Google, Ebay and Yahoo to the capital has boosted market confidence, relatively few businesses have followed in their wake.

And it's this shortage of new companies that has some property experts casting doubt on the bullish expectations for top-line rental growth.

One industry source pointed out that while agents are claiming to have signed deals of over €538 per sq m (€50 per sq ft) in recent months, "it is almost impossible to discover what sort of inducements are built into these contracts".

Over the past few years developers have resorted to buying out a tenant's existing lease in order to secure a high profile letting. There have also been generous rent-free periods and break options are now the market norm. Capital contributions are also common.

However, Declan O'Reilly of HT Meagher O'Reilly claims the shortage of high-spec office space in the city centre is shifting the balance in favour of landlords and developers.

He said generous inducement terms were on the way out. "Few if any developers are prepared to take out leases for tenants these days. That wasn't the case 12 months ago and, by the end of the year, I believe the terms will be even tighter for tenants because there is a real lack of large-scale, high-spec offices in the city centre."

He also dismissed concerns about the absence of new businesses in the capital and claimed the office market resurgence was underpinned by strong employment growth.

His comments are backed up by CB Richard Ellis Gunne's report, which predicts that 185,800sq m (around 2 million sq ft) of office accommodation will be signed in the market this year.

James Mulhall of the agency's office team claimed developers who had held off releasing their property in the past few years would now reap the rewards as rents were only "heading in one direction".

A number of large office blocks are due to come on stream this year, including Garret Kelleher's development at 75 St Stephen's Green and Quinlan Private's Observatory Building in the docklands. There is also The Oval in Ballsbridge and McNamara's Elm Park on the Merrion Road.

Space is also available in the remainder of Connaught House on the Burlington Road and in Park Place at Upper Hatch Street.

Marie Hunt, head of research at CB Richard Ellis Gunne, said fears of over-supply in the market were ill-founded: "We're comfortable that the supply-demand balance is in equilibrium at the moment," and she pointed out that over 45 per cent of office accommodation due for completion in 2006 in the docklands region of the city has already been pre-let with a further 28,000sq m (301,389sq ft) reserved.

"The uplift in confidence and activity witnessed in the Dublin office market in 2005 is not surprising when you consider the strong economic conditions and labour market trends that are supporting the market. Providing these elements continue and we have no reason to believe they won't, 2006 will prove to be another strong year for the Dublin office sector."