THE DUBLIN OFFICE market performed well in 2019, boosted by several sizeable transactions.
As has been the case for several years, occupiers from the tech industry continue to dominate the market. Tech players took half of all accommodation in 2019 and are likely to be strong this year. A drawback of this dominance is the two-tier market that has been created.
By virtue of the large amounts of space taken by the tech industry, around 800,000 square meters since 2012, prime headline rents have been substantially pushed upwards.
For many of these companies, rental rates are not a priority given their size. However, for professional services firms that have traditionally made-up a significant part of the market, the level of rent is more important.
To review this further and consider occupiers’ ability to pay rent, Lisney selected several large firms in the tech, accountancy and legal sectors, and compared their turnover per employee.
This measure is derived from Irish operations only, but some of these companies are conducting business and generating turnover from Ireland but not necessarily in Ireland.
It’s also worth acknowledging that turnover is not a measure of profitability but analysing it on a per-employee basis does provide a measure on a like-for-like basis.
The results and the variations between the tech industry and professional services firms are stark.
For the legal and accountancy firms reviewed, the range in turnover per employee was between €100,000 and €300,000. While tech companies the range was between €660,000 and €17.5 million.
This shows the differing ability to pay rent and how for some companies, the rate per square metre is insignificant, while for others it is majorly significant.
Striking a deal
It is not fair to suggest tech occupiers are callous when it comes to striking a rental deal, but clearly it is less of a focus.
Given the level of demand and the amount of accommodation reserved, 2020 will be another good year for the Dublin office market with take-up likely to be at a similar level to 2019, estimated at 250,000 square meters.
While this is less than in 2017 and 2018, it should be remembered these were exceptional years and included some very large deals. The 15-year average is closer to 220,000 square meters and activity in 2019 was ahead of this.
One of the reasons for the lower levels may be due to the lack of supply and the quality of accommodation on offer. Much of the activity in the last few years has been net absorption as new companies entered the Irish market or occupiers expanded and did not vacate existing stock.
The vacancy rate is now sub-8% and 2019 was always going to be a pinch point given the lack of new building completions.
Supply constraints will lead to further hardening of lease terms in the next 18 months with the possibility of rental premiums being paid on selected high-profile buildings.
The biggest risk to the office market in the short-term is an external macro-economic event. Over valuations of second-tier tech companies could also pose a risk to demand given the Dublin market is now so dependent on such occupiers.
Aoife Brennan is director of research at Lisney