Vacancies in the office market in suburban Dublin are prompting many landlords to reduce rents and offer a range of incentives on new space, according to market insiders.

With demand softening and availability high, most tenants now secure break options-to withdraw from long-term leases at specific times-and longer rent-free periods when contracts start.

The softer terms stem from the slower economic growth since the start of the year, linked to doubts about the capacity of the US economy to avoid recession. This has eased demand for office in the crucial IT and high- tech market, a key driver of speedy growth in the Dublin market in recent years. According to the latest data from DTZ Sherry FitzGerald, 73 per cent of first quarter lettings were in the IT and communications sectors, those hit hardest in the US slowdown. "These are the people who for the last three or four years have been taking up space in Citywest, Parkwest and Blanchardstown," said Declan O'Reilly, who handles office lettings for the company. "The first five months of the year were slower than we would have anticipated."

The vacancy rate in Dublin has risen to 7.3 per cent from about 3 per cent last year, he added.

This contrasted with a "true" vacancy rate in normal conditions of 5.8 per cent, reflecting deals agreed but not signed.

While the office market in Dublin 2 and 4 remains buoyant, insiders say landlords in the suburbs are settling for lower rents with more incentives to attract tenants, particularly in schemes where the fit out is about average. "Over the last couple of years, because demand has been so strong and generally exceeded supply, there was very little distinction between the poor quality space and really well built," said Mr Roland O'Connell, of Hamilton Osborne King.

Of the suburban market, he added: "There is a very clear distinction in those areas between high quality space and the poor quality space. That distinction is growing in terms of rent differentials and in terms of lease length." He said owners of high-spec properties had not dropped their expectations. Such space in the south city suburbs could generate rents of £18/£19 per square foot while the same quality property in the west city would make £16/£17 on the same terms.

Owners of lesser properties in the south city were quoting £18/ £19 per square foot per year, but willing to do deals at £16/£17 said Mr O'Connell. There was more variation in west Dublin, where owners at the low end of the market were quoting rents of £14.50/£16.50 per square foot per year, but prepared to accept £13.50. Similarly, Insignia Richard Ellis Gunne said demand for well-located property remained strong.

With staff retention now a major issue for employers, companies renting offices are keen to secure space near public transport, supermarkets and restaurants. These considerations have prompted demand in parts of central Dublin not traditionally in the business belt, according to Willy Dowling of Gunne. These areas include Parkgate Street, Capel Street and more particularly Talbot Street where Bank of Ireland are to move into a newly completed 56,000 sq ft block close to where An Bord Gais is also to have its Dublin headquarters. Landlords who offered break clauses after 15 years on 25 year leases are in many cases now willing to bring the option forward to seven or ten years, according to agents. Some are also willing to offer rent-free periods of three or six months to pin down a letting.

Citing the "simple economics" of supply and demand, Declan O'Reilly does not expect "major rental growth" this year. The slowdown had to be seen in the context of rapid increases over the past four or five years, he added. South city office block now renting at £18/£20 per square foot were pitched at only £12/£14 on the same terms in 1996 and 1997.

Still, Mr O'Reilly says the market has a degree of comfort because of the stricter credit criteria introduced by the banks 18 months ago for new developments.

He added that businesses which postponed the leasing of new space in recent months would be looking to proceed at the end of the year and in early 2002. This would fuel demand when the supply of new space might be restricted because of the tighter credit restrictiosn by the banks.