Irish Office Market Review Q2 2013

Transcription

1 Irish Office Market Review Q2 2013

2 Irish Office Market The following report incorporates a detailed overview of the Irish regional office markets including Dublin, Galway, Cork and Limerick. This market analysis covers occupation levels, vacancy levels and rental performance in each location. Transaction activity continued to fluctuate on a quarterly basis across all of the regional office markets There is a shortage of good quality large office floor-plates in all four regional office centres which has the potential to hinder market activity in the future Demand is primarily focussed on Grade A accommodation in all regional centres with most latent demand for the best quality Grade A1 stock Figure 1 Take Up in the Irish Office Market Q Q Notably there is no Grade A office floor-plates measuring over 5,000 sq m in the Limerick centre, only one such floor-plate in Galway, three in Cork and just seven in Dublin CBD Availability levels remain particularly high in the Cork and Limerick centres. That said, vacancy levels in the Galway office market remain the lowest of all regions There is currently no space under construction in any of the regional centres Table 1 Irish Office Markets - Key figures H Office Market Dublin Galway Cork Limerick Market Stock (Sq M) 3,350, , , ,300 Take Up (Sq M) 51,000 2,650 11,400 2,800 Availability (Sq M) 700,400 44, ,350 72,500 Vacancy Rate (%) Under Construction (Sq M) Q Irish Office Market Review

3 Dublin Office Market Take Up The Dublin office market stabilised in broad terms during Accordingly, the opening quarter of 2013 saw the gradual recovery of the Dublin office market continue. At the mid way point in the year, while overall activity in the market has been robust, actual occupation levels to date have been lower than expected. That said, the market is moving forward with take up activity expected to gradually accelerate during the second half of 2013 and into The recovery continues to diverge across the market with robust demand in the central business district but more sluggish activity in the suburban area. Notwithstanding old dangers and indeed new turbulence, the outlook for the remainder of the year has improved markedly. A gradual restoration of confidence has witnessed renewed interest for larger office floor-plates, a trend that emerged in the opening quarter and has continued into quarter two. However, a shortage of Grade A accommodation in the Central Business District to meet this demand has led to an increase in take up in the Renewed demand for larger office floor-plates secondary region and to a lesser extent the suburbs. This trend has been particularly evident among the larger sized deals. Following a somewhat moderate level of take up during the opening quarter of 2013, transaction activity in the Dublin office market strengthened during the second quarter. The total quantity of space transacted in the three months to June edged upwards to 30,700 sq m, representing a notable increase in demand. An analysis of the space transacted reveals a total of 51,000 sq m occupied in the year to date. Furthermore, the quantum of space reserved rose significantly during the three month period. A total of 85,700 sq m was reserved at the end of quarter two and a further 39,150 sq m signed. This should boost transaction levels in the latter part of this year and surpass the level attained in The level of net take up, which measures the change in occupied space, returned to positive territory following a decline in the first quarter of the year. Net take up stood at 46,000 sq m in the year to quarter two. The level of net take up continues to fluctuate on a quarterly basis due to significant movement within the market. Furthermore, the proportion of space signed at the end of quarter two outweighed the proportion of space occupied thus not impacting the level of net take up. An analysis of the profile of space transacted during the second quarter reveals an increased number of deals greater than 1,000 sq m. In relation to the space occupied, the largest deal taken up during the quarter measured approximately 2,950 sq m. This was the occupation by Google at Block P at East Point in Dublin 3. A further 2,300 sq m was occupied by Investec at the Harcourt Building on Harcourt Street, Dublin 2. There were also a number of significant deals signed during the quarter including approximately 5,300 sq m signed by Fidelity at 1 Waterside, Citywest, Dublin 24. Google have also signed an additional 3,900 sq m in Block R in East Point in Dublin 3. With regard to future demand, there are a number of high profile companies with requirements for space including software giant Microsoft, Yahoo!, Citibank, Groupon, Arthur Cox and Kelloggs. However, there is still on-going occupier uncertainty and as a result deals are taking time to close. The changing pattern of demand in the Dublin office market has seen the attractiveness of the Central Business District (CBD) as a location preference continue to dominate take up. At the mid year point approximately 49% of the space occupied during the opening six months of the year, was located in the CBD. A further 38% of the space both signed and reserved at present is located in the CBD. Figure 2 CBD Take Up by Area, H Q Irish Office Market Review

4 Dublin Office Market Take up Furthermore, modern accommodation, in particular Grade A accommodation, continues to account for the greatest share of take up. This is evidenced by the fact that 74% of the total space occupied in the CBD during the opening six months of the year comprised Grade A space. Moreover, Grade A1 remains the occupational preference. As a result the best space in the best buildings continues to diminish. There is approximately 105,100 sq m of A1 space available in the CBD, however over a quarter of this space is either signed or reserved; thus highlighting the impending shortage of top Grade A accommodation in the city. Within the CBD boundaries, the traditional core area remains the most sought after location; accounting for 54% of the CBD space occupied in the first six months of This was followed by the IFSC North Docks area accounting for 17%. The South Docks accounted for a further 12% with the Ballsbridge and Fringe areas accounting absorbing 10% and 7% respectively. Take-up in the CBD office market has traditionally been dominated by the financial sector. The aftermath of the financial crisis has seen a fall in demand from the financial sector which has been offset by a rise in demand by the IT/telecommunications sector. However, the first six months of 2013 has witnessed renewed interest from the finance sector with this sector accounting for 40% of activity in the year to date. The IT/telecommunications sector was also active accounting for 20% of all transactions during the six month period. That said, for the overall Dublin office market the IT/ telecommunications sector remained the dominant sector accounting for 35% of overall take up during the first half of the year. Active occupiers during quarter two included Google and Twitter. The finance sector accounted for 27% of the share of take up while the professional sector accounted for 17% of activity. The Pharmaceutical/Health sector was also active absorbing 4% of space during the six month period. The attractiveness of vacant freehold office blocks in the CBD to developers and occupiers continued during the quarter with sales completing on a number of buildings. Grattan Court on Grand Canal street, measuring approximately 3,900 sq m, sold for just under 5 million to an office developer planning to substantially upgrade and refurbish it. Oldbrook House on Pembroke Road, Ballsbridge, measuring 3,000 sq m was sold to an owner occupier. Furthermore, Findlater House on O Connell street, with a total floor area of 5,350 sq m, was sold to a hotel operator who plans to convert the building into a hotel. Figure 3 Dublin office market: take up (Sq M) & vacancy rate (%), Q Q Irish Office Market Review

5 Dublin Office Market Availability Supply levels in the Dublin office market remain polarised. Grade A space in the CBD continues to diminish, which is in contrast with a healthy level of second-hand accommodation outside of the CBD boundaries. Furthermore, with new supply non existent, the shortage of Grade A space has resulted in an improvement in sentiment for refurbishment opportunities. The total quantity of available office space in Dublin declined modestly during the second quarter of 2013 to stand at 700,400 sq m at the end of June. This represents a 5% reduction during the three month period and is largely driven by a notable slowdown in the rate of release of second hand space to the market during the three month period. Furthermore, with approximately 39,100 sq m of office space signed, net availability stands at 661,300 sq m. Similarly, supply levels in the CBD also witnessed downward pressure during the second quarter; declining by 4% during the three month period. Total availability in the CBD stood at approximately 203,800 sq m equating to 35% of the total available office space in the capital at the end of June. Net availability stands at 237,900 sq m with a further 40,900 sq m of office space reserved at the end of quarter two. Supply levels in the CBD continue to recede Grade A availability remains to be the most sought after in the CBD and continues to dominate take up in this region. Approximately 74% of the space transacted in the CBD in the year to date comprised Grade A space. As a result the supply of Grade A space continues to fall at a faster rate. At the end of June, total Grade A space stood at 160,200 sq m; down 8% on the level recorded twelve months previously. There is approximately 105,100 sq m of A1 space available in the CBD. However, over a quarter of this space is either signed or reserved. Furthermore, an occupier seeking 5,000 + sq m of prime space has limited choice with just seven floor plates available to satisfy this requirement, three of which are currently reserved. The high level of supply of second hand space in the overall market remains a concern, although the rate has lessened considerably compared with rates witnessed at the onset of the downturn. Upside risks have not fully diminished with some potential for future consolidations and relocation activity. The overall level of supply remains stubbornly high by historical standards. This is further highlighted by an analysis of the vacancy rate. The vacancy rate stood at 20.9% at the end of June. This compares with 22.3% recorded twelve months previously. The corresponding vacancy rate in the CBD stood at 14.3%, down from 15.4% recorded in the previous year. It is important to note that approximately 51% of the total office stock in the capital is located in the CBD. Figure 4 CBD Availability by Area, Q The level of take up seen in quarter two somewhat masks the real activity in the market with many occupiers, particularly in the Tech sector, ramping up their requirements for space. This is highlighted by the amount of space currently, or about to be, reserved in the market. When this space is taken-up it will have a significant impact on the actual vacancy rate but moreover on general confidence levels Ronan Corbett, Director of Offices DTZ Sherry FitzGerald 5 Q Irish Office Market Review

6 Dublin Office Market Availability Rental Levels A significant proportion of the vacant space is older stock which could be deemed effectively obsolete. This stock has been on the market for a considerable number of years and therefore arguably masking the true vacancy rate in the market. An analysis of the spread of overall available space in the office market at the end of quarter two 2013, reveals that the suburbs continues to account for the majority of accommodation, 40%, unchanged from the previous quarter. This would suggest that the vacancy rate in this region is significantly greater than the overall market rate of 20.9%. A further 26% of accommodation is located in the secondary region. The volume of space under construction fell to zero during Since then, no new space has commenced construction and with no new development starts scheduled at present. Development activity is expected to be limited during 2013 which will allow for a steady absorption of the excess space available in the market at present. Furthermore, it is highly unlikely there will be any speculative development given the large overhang of available space that exists in the market. That said, it is possible that we could see the first pre-let in the market by an occupier in late 2013/2014. A number of professional service companies are looking for bespoke buildings that currently do not exist. In order to get these buildings built and having cognisance for existing use values on prime CBD sites, these occupiers will most likely have to pay a rent in the region of per sq m. The total stock of office accommodation remained unchanged at approximately 3,350,100 sq m at the end of June As supply levels in the CBD recede, in particular Grade A space, prime rents are beginning to come under pressure. In the CBD, headline rents for third generation prime accommodation rose to approximately 323 per sq m at the end of June. This marked the first quarterly increase since the second quarter of Furthermore, there have been some recent transactions within the CBD at headline rents between 334 per sq m to 376 per sq m. However, these are not an indicator of a wider trend in the market but reflect the shortage of quality and pent up demand for properties in the CBD. The incentives available on existing new Grade A space have started to tighten and lease flexibility is beginning to diminish. In the suburbs, rents can vary significantly depending on location and building specification, but have remained broadly unchanged since mid The south suburbs continue to see the strongest suburban headline rental levels, particularly in Sandyford where rents range between 161 and 194 per sq m per annum. In the western suburbs rents typically range between 86 and 150 per sq m per annum. In the northern suburbs, headline rents generally range between 129 and 150 per sq m per annum. 6 Q Irish Office Market Review

7 Galway Office Market Quarterly fluctuations continue to dominate the Galway office market with subdued demand and transaction activity witnessed in the second quarter of Approximately 600 sq m of office accommodation transacted during the three months to June, representing a reduction in both the total volume of take up and also the number of deals transacted during the quarter. Total take up levels in quarter two reveal a significant reduction on a quarterly and an annual basis, with just two deals closing in the three month period. The most sizable transaction in the quarter was the occupation of 400 sq m in Calbro House on the Tuam Road, which is understood to be an existing tenant expanding. A further 200 sq m was taken up over Block 2 in the Ballybrit Business Park. In annual terms, the total quantum of transacted accommodation stood at 12,500 sq m; representing a 5% increase when compared with the corresponding period in Moreover, 45% of units taken up in the twelve month period measured less than 500 sq m; Appetite for smaller deals dominates market place highlighting the appetite for small to medium sized space in the market. An analysis of the profile of space transacted in the twelve months to June reveals that demand for accommodation in the suburbs continues to dominate the market. 75% of the transacted space was located in the suburbs while the remaining 25% was taken up in the city centre. Suburban offices are achieving rents in the region of per sq m under flexible lease terms. Notably, 77% of space occupied was grade A accommodation, while 61% of occupied space comprised the best quality grade A1 space. Availability levels in the Galway office market witnessed a 15% increase on a quarterly basis in the three months to June. Total available accommodation now stands at 44,800 sq m. In addition, when comparing availability levels to the same period in 2012, an increase of 17% is revealed. The recent vacation of the former Department of Agriculture office space in the Dockgate building has had a significant impact on supply levels. Table 2 Galway Office Availability by Grade A, Q A Stock Figure 5 No. of Offices City Centre Sum of Availability Sq M < 1,000 sq m 3 1,750 6 > 1,000 5,000 sq m 4 10, > 5,000 10,000 sq m 1 5, Sub-total 8 18, Suburbs < 1,000 sq m 4 2,600 8 > 1,000 5,000 sq m 5 9, > 5,000 10,000 sq m Sub-total 9 12, Total 17 30, Galway office market: total availability (Sq m) & vacancy rate (%), Q % 7 Q Irish Office Market Review

8 Galway Office Market A breakdown of the location of available accommodation reveals that the suburbs continue to account for the majority of accommodation, 55% with the city centre accounting for 45%. The city centre remains challenged with a relatively large amount of vacant second generation office space. Of the accommodation that is available for occupation, 68% of it is accounted for with grade A office space; 46% of this is grade A1 accommodation. The remaining 32% comprises grade B space. Of the grade A space, 40% of this is located in the suburbs. Notably, just one office unit in the Galway office market measures over 5,000 sq m, highlighting the lack of larger floor plates and indeed good quality larger floor plates. In line with the increase in supply levels, the vacancy rate for the Galway office market witnessed a rise of 200 basis points to 15.1% on a quarterly basis. That said, the Galway office market continues to experience the lowest vacancy rate of all regional office markets. 8 Q Irish Office Market Review

9 Cork Office Market The strength of demand evident in the opening quarter of 2013 in the Cork office market continued during quarter two. The quantum of space taken up rose on a quarterly basis by 44% with solid take up levels of 6,700 sq m recorded in the three month period. In addition, annual take up levels remain robust. Notably, smaller sized deals continue to dominate the market, as just four deals transacted in the quarter measured over 300 sq m. The most sizable deal in the three month period to June was the lease of 2,500 sq m in City Gate Park in Mahon, which was occupied by Ronan Daly Jermyn Solicitors, an Irish law firm. Security technology giant, McAfee, have taken a further 1,400 sq m of office space in City Gate; in addition to the 5,650 sq m already acquired by the company. Furthermore, Qualcomm, a leading Strong demand continues smartphone powerbroker, have taken 1,350 sq m of space in the same region; reportedly for an R&D centre. In addition to this, 350 sq m was taken up on Victoria road by Cork Community art link, on a four year lease. Simultaneously, robust enquiry levels were experienced during the quarter, in particular for the right product ; as witnessed by the volume of transactions in City Gate Park. Notably, a further 4,600 sq m has been signed here by IT storage solutions giant, EMC. The space will cover two floors and is currently being fitted out. Furthermore, 7% of available accommodation is currently reserved which should positively impact activity levels in the coming months. On an annual basis, markedly high levels of transaction activity were recorded; take up levels standing at approximately 31,550 sq m. This represents a significant increase from the corresponding period in 2012 when annual take up levels stood at 10,650 sq m. A breakdown of the profile of space occupied during the twelve month period to quarter two reveals that demand is concentrated on higher quality Grade A accommodation, absorbing 89% of all occupied stock. Notably, 67% of this space was the best quality grade A1 accommodation. The suburbs remain the location of preference for transaction activity accounting for 73% of space taken up with the remaining 27% occupied in the city centre, perhaps not surprisingly, given the limited amount of quality stock available in the city centre. Rents being achieved in this area fall within the bracket of Table 3 Cork Office Availability by Grade A, Q A Stock Figure 6 No. of Offices Sum of Availability Sq M City Centre < 1,000 sq m 45 11, > 1,000 5,000 sq m 9 14, > 5,000 10,000 sq m Sub-total 54 26, Suburbs < 1,000 sq m 68 23, > 1,000 5,000 sq m 18 29, > 5,000 10,000 sq m 3 28, Sub-total 89 81, Total , Cork office market: total availability (Sq m) & vacancy rate (%), Q % 9 Q Irish Office Market Review

10 Cork Office Market Total available stock has reduced in the three month period by 5%, which is the second successive quarterly decline; supply levels now standing at 130,350 sq m. That said supply levels remain higher in annual terms; recording a 1% increase. An analysis of the spread of available space reveals that the suburbs continued to account for the majority of accommodation, 70%, while the city centre accounted for the remaining 30%. Furthermore, the quality of available accommodation is reflected in the fact that 82% of available stock is grade A; of which 60% is the best quality grade A1 stock. Having said that, there are just three Grade A offices measuring over 5,000 sq m available in the Cork office market; all of which are located in the suburbs. The vacancy rate for the Cork office market at the end of June reduced from 25.4% to 24.2%; also dropping from 24.7% in annual terms. The vacancy rate remains three times higher than the market equilibrium of 7%. 10 Q Irish Office Market Review

11 Limerick Office Market Market activity continues to fluctuate on a quarterly basis in the Limerick office market. Total take up levels of 1,500 sq m were recorded for the three month period to June; revealing a 17% increase on quarterly transaction levels. That said, just three deals occurred in the quarter. The largest sized deal in the three month period was the lease of 700 sq m in Phase 2, City East on the Ballysimon Road. This has been occupied by Northern Trust, a financial services company. A further 200 sq m was let in the Callan Centre, the National Technology Park. Furthermore, a unit measuring 600 sq m in Thomcar House, Mungret Street was sold and occupied in the three month period. On an annual basis, the total quantity of accommodation occupied in the twelve months to the end of June stood at 8,550 sq m. This represents a 17% reduction on take up levels recorded in the comparable period last year. Interestingly, upon examining the profile of occupied space, grade A space accounted for 92% of all transactions in the twelve month period. The suburbs remain the preferred location as approximately half of all transactions in the year to date occurred here. The city centre Quarterly fluctuations in activity persist accounted for 37% of occupied space while the remaining 11% was taken up in the Shannon Free Zone. Rents being achieved in this area fall within the region. Total availability levels reduced to 72,500 sq m in the Limerick office market during the second quarter of This reflects a 2% decrease on the previous three month period. Moreover, when compared with the same period in 2012, a reduction of 3% is recorded. An analysis of the spread of available space reveals that the city centre continues to account for the largest proportion of available space, 44%. The suburbs and the Shannon Free Zone account for 28% and 28% respectively. A further breakdown of available accommodation reveals that approximately 37% of available stock is grade A stock, while just 10% of available stock is of the highest quality Grade A1. Furthermore, 44% of available accommodation comprises shell and core space. As a result of limited finance for potential tenants/landlords, it is unlikely that this figure will reduce in the immediate future. In addition, there is a limited amount of fitted accommodation that will satisfy the current larger floor plate requirement in the market as there are currently no grade A offices measuring more than 5,000 sq m. An examination of the vacancy rate for the Limerick office market has shown that the vacancy rate moved marginally upwards to stand at 21.5% in the three month period to June. However, the vacancy rate stood at 22.3% in the comparable period in 2012, reflecting a reduction year-on-year. Table 4 Limerick Office Availability by Grade A, Q A Stock No. of Offices City Centre Sum of Availability Sq M < 1,000 sq m 37 8, > 1,000 5,000 sq m 1 1,300 5 > 5,000 10,000 sq m Sub-total 38 9, Suburbs < 1,000 sq m 26 6, > 1,000 5,000 sq m 2 3, > 5,000 10,000 sq m Sub-total 28 9, Shanon Free Zone < 1,000 sq m > 1,000 5,000 sq m 4 6, > 5,000 10,000 sq m Sub-total 4 6, Total 70 25, Figure 7 Limerick office market: total availability (Sq m) & vacancy rate (%), Q % 11 Q Irish Office Market Review

12 Outlook for the future At the mid way point in 2013, there is encouraging evidence of a strengthening of demand in the Irish office market. This is evidenced by the uplift in activity most notably in Dublin and Cork and an emerging shortage of product in the central business districts of all regional centres; in particular for larger grade A floor plates. Looking to the immediate future it now seems clear that overall transaction activity should reach or exceed 2012 levels in most locations. Rental inflation has begun to creep back into the markets with Dublin showing positive rental inflation for grade A space in the CBD during the year to date. Although we are unlikely to see speculative development of any nature any time soon we could see a return to pre-let development by late 2013 early A number of occupiers are seeking space of a size and grade that does not exist at the moment, which could lead to construction activity re-emerging in a couple of regional centres by even year end. Table 5 Indicative Regional Office Rents Q Location Third Generation City Centre Sq M Third Generation Suburban Sq M Dublin Cork Galway Limerick Q Irish Office Market Review

13 Market Definitions Take Up: Occupation of a building by a tenant. Reserved: Under active negotiation with single tenant. Pre-let: Contract is signed by tenant but premises are not yet occupied. Pre-sold: Contract is signed by tenant but premises are not yet occupied. Vacancy Rate: This is the ratio of availability to market stock. The vacancy rate for the Dublin office market is calculated excluding Georgian accommodation. The vacancy rate for the Limerick office market is calculated excluding Georgian accommodation. The vacancy rate for the Cork industrial market excludes the South East region and Ringaskiddy Office Market Definitions: 3rd Generation: Modern Buildings, post 1990, with raised access floors. 2nd Generation: Older Buildings, pre-1990, with floor trunking. Georgian: Approximately REGIONAL OFFICES Cork Categories: City Centre: Central Business District and adjoining areas. Suburban: Locations outside city boundaries such as Little Island, The Airport, and areas adjacent to the South Link Road system. Limerick Categories: City Centre: Central Business District and adjoining areas. Suburban: Locations outside city boundaries such as Raheen and the National Technological Park. Shannon Free Zone: Shannon Free Zone, Shannon, Co. Clare. Galway Categories: City Centre: Central Business District and adjoining areas. Suburban: Locations outside city boundaries such as Oranmore and Mervue. Dublin Office Market Definitions: Central Business District: This incorporates the prime area of the city and extends to the IFSC and North and South Docklands. Secondary: Locations adjacent to the prime region Suburban: Locations outside city boundaries such as Clonskeagh, Blackrock, Tallaght, Sandyford and the M50. Vacancy Rate: This is the ratio of availability to market stock. The vacancy rate for the Dublin office market is calculated excluding Georgian accommodation. 13 Q Irish Office Market Review

14 AUTHORS Marian Finnegan Chief Economist, Director Research +353 (0) marian.finnegan@dtz.ie Siobhan Moloney Research Manager +353 (0) siobhan.moloney@dtz.ie Tanya Duffy Research Assistant +353 (0) tanya.duffy@dtz.ie About DTZ Sherry FitzGerald DTZ Sherry FitzGerald is the sole Irish affiliate of DTZ, a UGL company, a global leader in property services. With Irish offices in Dublin, Cork, Galway, Limerick and an associated office in Belfast, we are the largest commercial property advisory network in Ireland and are part of Sherry FitzGerald Group, Ireland s largest real estate adviser. We provide occupiers and investors around the world with best-in-class, end-to-end property solutions comprised of leasing agency and brokerage, integrated property management, capital markets, investment, asset management and valuation. DTZ has 47,000 employees including sub-contractors, operating across 217 offices in 53 countries This report should not be relied upon as a basis for entering transactionswithout seeking specific, qualified, professional advice. It is intended as a general guide only. This report has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. While reasonable care has been taken in the preparation of the report, neither Sherry FitzGerald nor any of directors, employees or affiliates guarantees the accuracy or completeness of the information contained in the report. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. No warranty or representation, express or implied, is or will be provided by Sherry FitzGerald, its directors, employees or affiliates, all of whom expressly disclaim any and all liability for the contents of, or omissions from, this document, the information or opinions on which it is based. Information contained in this report should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ Sherry FitzGerald.