Office vacancy rate could move above 10% this year – BNP Paribas Real Estate
The vacancy rate in the Dublin office market stood at 10% last year and could edge higher this year, a report from consultants BNP Paribas Real Estate Ireland concludes.
2021 was the weakest year for lettings since 2012, the report found.
But the rise in the vacancy rate was contained by relatively modest levels of development after the construction sector was hit with the second lengthy lockdown of the pandemic.
Following the deferral of a number of projects in the final months of last year, the construction pipeline for 2022 is described as ‘strong’.
“We estimate that up to 240,000 square metres of new office space could be completed this year,” John McCartney, Director of Research at BNPPRE said.
“Although leasing activity is recovering, and approximately 75,000 square metres of space was reserved as we entered the new year, absorption is unlikely to match this figure and therefore vacancy could edge higher in 2022,” he concluded.
That would likely have a knock-on impact on rental prices.
Prime headline rents in Dublin stand at around €619 per square metre per annum, the report concluded, which is about 7.6% off their pre-Covid peak.
“Years of empirical research, including on the Dublin market, have established a fairly reliable inverse lagged relationship between vacancy rate and rental movements,” Mr McCartney explained.
“With vacancy up in 2021, this suggests that average rents may slip further in 2022, and tenant incentives may increase.”
He suggested that with completions likely to exceed office take-up this year, prices could move in the tenant’s favour next year too.
While any slippage in rents is expected to be modest, a recovery in average rents is not likely to materialise before 2024, the report concludes.
However, there are significant variations within the market at the moment with rents for the ‘best in class’ buildings in prime locations expected to outperform.
“With many corporate occupiers now only considering new space with the appropriate environmental certifications, the rent gap between modern and older buildings – which tends to widen in a softer market anyway – may expand,” John McCartney said.
The report points to a more ‘balanced’ pattern of office leasing in the last year with occupiers in the area of Information and Communication Technology accounting for a third of all office uptake in Dublin in the year.
Between 2017 and 2020, companies in the ICT sector accounted for 55% of office uptake.
Activity in the professional services sector rose from around 6.5% of take-up between 2017 and 2020 to almost a third in 2021.
“In part, this reflects the pattern of jobs growth – professional services employment in Dublin rose by 33.4% in the 12 months to September 2021, and accounted for 46% of all the service sector jobs that were created,” the report noted.
“But in a small market like Dublin, particularly in a relatively sluggish year, the distribution of lettings can be heavily influenced by a few large deals.”