Rising Vacancy Provides Opportunities for Tenants

Sluggish Take-Up in Q1
Vacancy Set to Reach 15%
Average Rents Falling
More Choice and Value for Tenants
Leasing to Strengthen as Year Progresses

Hybrid working and stalling growth in tech employment contributed to a slump in Dublin office lettings over the first three months of 2023. Despite Q1 usually benefiting from seasonal effects, Dublin office take-up reached just 26,500 sq m in the opening quarter, bringing lettings almost back to pandemic-era levels.

Paradoxically, the number of deals was actually up slightly compared with Q1 2022, and the slowdown was entirely due to a 44% reduction in the average deal size. According to Keith O’Neill, Head of Office Agency at BNPPRE, this derives from a change in the profile of companies taking space;

“The tech slowdown has caused a shift from big multinational tech companies seeking large quantities of space to our traditional baseline of domestic professional and financial services firms, whose space requirements are typically smaller”

With buildings which were planned before Covid now coming through as completions, office supply rose faster than the growth in demand in Q1, causing vacancy to edge-up from 12.4% to 12.6%. Historically, Dublin office rents have come under pressure whenever vacancy exceeds 11%. Consistent with this, average rents fell by 5.6% year-on-year in nominal terms although, with general inflation running at 7.7%, the real decline has been substantially sharper. Prime headline rents, which track the performance of the very best buildings in the market, are still rising. However, the rate of growth in this measure slowed during the quarter and is expected to stall in the coming months as a big uplift in Q2 2022 washes out of the annual comparison.

While this clearly throws down challenges for developers and landlords, Keith O’Neill says it has provided opportunities for occupiers, particularly smaller tenants who are prepared to consider slightly older buildings;

“Despite the weaker headline numbers we are actually seeing quite a lot of activity on the ground, particularly in that 500 – 1,000 sq m range, and occupiers are responding positively to better value in the market. Fully fitted options are preferential as occupiers look to avoid significant capital expenditure on carrying out new office fit outs. That said, we are also seeing evidence of Landlords offering attractive incentive packages where office suites are not fitted or in need of full refurbishment.

O’Neill also notes the fact that reserved space increased in Q1, which augurs well for a pick-up in leasing later in the year;

“Space with ‘heads of terms’ agreed rose by 14% in Q1. In the past this has been a reliable predictor of increased take-up next quarter. We are seeing this in on-the-ground activity and I expect full-year take up to recover to somewhere around 180,000 sq m.”