a breakdown of supply and demand

Kate EnglishChief Economist and Head of Ireland Research and Information, Cushman & Wakefield, explains why demand for ESG complaint office space is driving record rents in Dublin’s central business district.

The vacancy rate in the Dublin office market is higher today than in 2019, and yet, contrary to what theory suggests, rental growth and, indeed, record rental levels are being achieved. Seen from the outside, this makes no sense. However, a detailed breakdown of demand and supply data reveals why.

Although Covid-19 has led to greater flexibility in the way we work, employment in office sectors has grown, led by technology. According to the CSO, Information & Communication (IC), a technology-based employment proxy, grew by +55,000 between 2016 and 2021. Unsurprisingly, technology accounts for over 30% of job take-up. offices in Dublin, with professional services, finance and state occupiers following.

TWO LEVELS MMARKET

Such labor market developments are a propellant for the space reserved, signed and required. There is around 392,000m² of active live needs in Dublin today according to Cushman and Wakefield. To put it into context, the long-term annual average of take-up, or newly occupied space, is close to 155,000 m². In the five strongest years before Covid-19, it was 256,050 m².

Analysis of signatures, reservations and requirements clearly shows the overwhelming preference of current occupants for spaces that are 1) in the central business district (CBD) and 2) ESG compliant. These two characteristics are more important than ever, creating a two-speed market.

DEMAND TRENDS

CBD accounts for 75% of the previously mentioned living tenant demand. The CBD also represented 65% of take-up and 80% of surface areas signed in H1 2022, a jump from the historical trend of 51%. In addition, approximately 75% of signed spaces in the Dublin office market in the first half of 2022 are in spaces energy rated BER B or higher.

In contrast, an estimated 42% of the available net space in the CBD is BER C or below. The current net vacancy in the CBD is 5.9%, or 133,350 m². This figure varies from submarket to submarket, with some areas such as the South Docks again down to just 3%. If you were to exclude space with a BER C or lower rating, or even part of it, that further reduces viable vacancy. It is reasonable to exclude some of the spaces with the lowest energy ratings, as many companies have ESG commitments that they must also meet.

FUTURE SUPPLY

Supply kicks off, with 415,280 m² under construction in Q2 2022 (364,400 m² in the CBD) and delivery dates ranging from 2022 to 2025. Of what is due to be completed by the rest of 2022, 61 % is rented or reserved. This figure is lower from 2023, but given current demand volume and trends, it is reasonable to conclude that this is likely to be absorbed. It is worth noting that since 2015, nearly 845,000 m² of space has been built, but take-up has doubled.

The vacancy rate in the Dublin office market is higher today than in 2019, and yet, contrary to what theory suggests, rental growth and, indeed, record rental levels are being achieved.

OLD STOCK UNDER PRESSURE

To conclude, as 2022 progresses, any questions asked about economic uncertainty will naturally be asked about the office market. However, the level of emphasis occupiers are now placing on ESG and the CBD is creating upward rental pressure, leading to record rents on the most sustainable space located in the CBD. This will continue to support the upscale segment of the market and drive rental growth.

However, there’s no denying the biggest questions now being asked about older, more energy-poor stocks that don’t meet modern requirements. Therefore, any analysis of demand, supply and even rental prospects should be done on this basis at two levels, rather than at an aggregate level, to fully understand and convey the market dynamics at play.

cushmanwakefield.com

Jose C. Birney