The year 2000 was another exceptional period in terms of demand in the Dublin office market, with every indication that take-up levels for the year will approach the record level achieved in 1999.
The strength of demand for office accommodation, particularly over the past three years, has led many to question where and when it will all end. Others question whether rents of £40 per sq ft are sustainable in the wider European market while fears of a potential oversupply in the market still linger. In order to answer these and other questions on the office market it is worth reviewing activity in the year to date before attempting to forecast demand in the short to medium term. Occupier demand in the Dublin office market remained at a premium throughout the year, with an estimated 1.7 million sq ft of accommodation taken up during the first nine months of the year.
A review of the market transactions in the intervening period suggests that this figure will approach or even exceed 2.15 million sq ft by the year end. The IT/communications sector continued to dominate the profile of tenants occupying space in the Dublin market. Approximately 46 per cent of the space taken up in the first nine months of the year was acquired or occupied by firms in the IT/communications sector while financial firms such as Bank of Ireland, AIB and BISYS Fund Services took up a further 25 per cent of the space. However, the strength of demand for office accommodation is perhaps most clearly manifested in an analysis of the vacancy rate, which stood at 3.9 per cent at the end of the third quarter, with every indication that it could fall further by year end. Is this buoyant demand, which has been a feature of the office market for a number of years, likely to be sustained in the medium term?
The answer to this question lies in an analysis of employment projections. The total number of people employed in Ireland grew by an estimated 95,000 in 1999 with current forecasts suggesting further growth of 68,000 in 2000 and 51,000 in 2001. While it is clear that the pace of employment growth is slowing, largely due to supply side constraints, it is important to note that employment in the service-based industry is forecast to accelerate in the short to medium term. More than 50 per cent of people employed in the office industry are located in Dublin, a factor which has underpinned occupier demand in the Dublin market in recent years. A correlation between employment growth and occupational density levels provides an indicator of demand in the Dublin office market. The result of this analysis reveals potential demand for approximately 10.7 million sq ft of office accommodation over the period 1999 to 2005. Taking into consideration space which has already been taken up during 1999, this translates into an average annual take-up of 1.4 million sq ft. In comparison, the period 1993-1998 saw annual average take up of approximately 1.03 million sq ft.
The latest available statistics reveal there is an estimated 3.77 million sq ft of office accommodation under construction. It is interesting to note that the combination of office space in enterprise and other suburban locations comprises 61 per cent of all space under construction. It is also worth noting that 23 per cent of this space is pre-let and 4 per cent reserved. In contrast, only 22 per cent of the space under construction is located in the traditional office market of Dublin 2 and 4 where demand is greatest. Demand is also strong for accommodation adjacent to the city centre as reflected by the relatively large proportions of this space, which is pre-let and reserved at 45 per cent and 16 per cent respectively. An analysis of potential future supply through a review of the planning process reveals a similar trend. Approximately 81 per cent of the office space for which planning permission has been granted is located in the suburban market. In contrast, only 11 per cent is located in the traditional office market of Dublin 2 and 4 while a further 8 per cent is located in Dublin 1 and 3. This limited potential for increased supply in the traditional central business district will underwrite rental levels in the prime office market in the short term, while rental inflation in the suburban market will inevitably be impacted by the supply trends.
In summary, the outlook for the future of the Dublin office market remains positive, with every indication that the strength of employment growth will continue to sustain occupier demand in the medium term. Take-up levels will begin to moderate slightly, reflecting the deceleration in employment growth; however, this moderation will be gradual, taking place over the next two to three years. Rental levels in the central business district, which remain competitive in the wider European environment, will be underwritten by the limited supply potential in the prime market, while the pace of rental inflation in the wider suburban market will be determined by the proportion of planned space which is actually delivered to the market.
Declan O'Reilly is a director of DTZ Sherry FitzGerald
