Rents Need To Hit Record €70 Per SF To End Dublin Office Supply Crunch. That May Take Awhile

Grade A Dublin office rents need to hit a record €70 per SF before investors and developers will back the new construction of prime commercial real estate, despite the widely expected halt on new space delivery by the end of next year.

Speaking to a packed house at Union Investment’s Two Grand Parade for Bisnow’s Irish Office and Workplace Summit, a panel of international investors warned that although the investment environment for offices had become more positive, high land and building costs meant creating new, well-located and highly amenitised developments remained prohibitive.

The rent needed to make development viable is nearly 10% higher than the €65 per SF U.S. hedge fund HedgeServ reportedly paid to rent 75 St Stephen’s Green in March 2008, a figure which prime space in the city is only nudging again now, typically at between €62.50 and €65 for the best space, according to market data.

“No one will build at less than €70 per SF,” Mark Vice President Investment and Asset Management Alexandre Tuchmuntz said. “Scarcity of supply remains because it is hard to make the numbers work on ground-up development or refurbishment of high-ESG and -amenities offices. The supply crunch is there to stay.”

However, Tuchmuntz said that low supply could start to push up rents and that occupiers seemed readier to pay higher rents for the right buildings.

Orion Capital Managers principal David Larzilliere said the company likes the Dublin office market and feels it is moving in the right direction, but he said the speed of the upturn and the strength of momentum remained unknown.

“Those that acquired projects in previous cycles and that have existing exposure are waiting for rental growth, while there are others who want to invest in new projects today, but it’s hard with all the risks,” he said.

As a result, as is the case in London, investors might look to buy good-quality existing assets as a way of capturing rental growth without needing to undertake ground-up development. 

“So can we buy existing stock, meet demand earlier? For us as an investor, it’s a big question,” Larzilliere said. “Are there smarter investments to be made by buying existing projects without taking the full real estate risks?”

Tuchmuntz added that a supply crunch seems inevitable, pointing out that a prospective tech pullback “hasn’t really happened” and said that higher demand from retail and leisure users had reclaimed ground floors in office buildings that had previously been earmarked as office space.

“Specific assets, but not all buildings, will meet the financial requirements for retrofitting, but this can be not only expensive but also complex,” he said of revamping existing properties.

“We were expecting to see a wave of distressed assets, but we just haven’t seen that, so it’s difficult from an opportunistic point of view,” he said. “Now rates are coming down, so investors are looking again.”

Fine Grain Property Chief Operating Officer Darragh Lennon speculated that to reach more than €70 per SF to achieve viability might mean five years with little new development. Traditionally, GDP and office demand tended to align, but this time the latter might rise as GDP drops, he said.

Given the selective nature of occupier demand, he also said that while stranded assets are more commonly associated with carbon use and energy efficiency, in Dublin it may be about amenity and quality of building as well.

“With big occupiers leaving their older offices, those buildings need to be substantially upgraded, there will be a stock of assets that need work and capital, and the question is whether it’s there and whether the pricing is viable,” Lennon said. “So, the pricing needs to become more realistic for locations that are not quite there.”

He added that occupiers have started to get nervous about the prospects of identifying high-quality, well-located offices for their future requirements, hence increased activity, particularly among the professional services sector.

“We know things are stable, but it is still a theory whether we will see a recovery,” Lennon said. “When we see that first rental deal done at €70 per SF, that will make a big difference.”

When it comes to investment, while Orion's Larzilliere said the gap between buyers and sellers was narrowing for distressed situations and that a greater volume of deals had created more pricing clarity, he questioned whether there was enough capital to chase those assets.

“The good news is that core capital is back, but it is super selective,” he said. “Germany in particular is more active, which is very good news for the market. The macro story of Ireland is also very good. The problem compared with other countries is that the domestic capital pool is very limited, which means a reliance on foreign capital. Germany and some family offices have added core capital, but it’s hard to see a lot of other core buyers.”

The session was moderated by Taylor Wessing Ireland partner and Head of Real Estate Orlaith Molloy.