Office space in short supply

Sunday Business Post - Commercial Property Pages - May 27 2007

A lack of well fitted out commercial space in regional locations nationwide is pushing up rents in the sector, writes Dermot Corrigan.

Ireland’s regional cities are facing a critical lack of high specification office space. The lack of suitable, available, centrally located, office accommodation is driving up city centre rents around the country.

The situation in Cork is symptomatic of this. “Demand is good, but there is a lack of available space in Cork city centre,” said Edward Hanafin of Lisney. “City centre rents for office space in new third generation buildings are in the region of €270 to €323 a square metre.”

The lack of available space is mirrored in other locations around Ireland.

“There is very strong demand for new, city centre office development in Galway city, however there is a limited supply of such properties,” said Colm O’Donnellan of O'Donnellan Joyce.

“Rents would be going around €20 to €25 per square foot for the city centre. There is a strong demand for properties at that, but unfortunately there is a shortage in supply.”

According to John Buckley of DTZ in Limerick, the office market in that city is showing a lot more activity than it was last year, resulting in growth in both rental levels and capital value.

“You are looking at about €194 to €215 per square metre for shell and core finish in the city centre,” he said.


In Galway and Limerick, the lack of available space means that rents are relatively static.

“Rents in the office market have increased slightly in the last twelve months,” said O’Donnellan. “If city centre space was available there would be a substantial increase, but there is a limited supply”

“There are a number of infill sites within Limerick city centre, but not a lot on the supply chain,” said Buckley. “The largest development there would be at Henry Street, which the government has taken for decentralisation. That is about 5,575 square metres of offices. Apart from that there is not an awful lot available on the market.”


Suburban Business Parks

The situation on the edge of Ireland’s major regional cities is somewhat different. A large sprinkling of suburban business parks has sprung up in recent years. These have provided a supply of high-spec and relatively cheap office space to local and international businesses.

“The availability is in the business parks, like Cork Airport Business Park and Fota Business Park in Carrigtwohill,” said Hanafin. “As you go out to the business parks you are in the range of €194 to €215 per square metre.”

“Newer office developments have been built in the last two years in the suburbs,” said O’Donnellan. “There is a new scheme on University Road which we have just leased the ground floor of to a banking institution.”

“The main suburban areas in Limerick are the National Technological Park, Castletroy and Raheen - within those markets we would have terms agreed this year on about 3,716 square metres of space. You would be looking at rents of about €183 per square metre in those areas,” said Buckley.

“The market in Limerick generally provides the accommodation on a shell and core basis, and then individual fit out packages are negotiated. Generally, each occupier will require raised floors, suspended ceiling, air conditioning and a high degree of quality on the fit out. All of the modern buildings are designed to accommodate that.”

Hanafin said that tenants like to see services in place for their employees in the vicinity of suburban business parks.

“They are also looking at the availability of other services in the area for their employees, such as shops, restaurants, car parking and transport,” he said.

City centre office space can be harder to let if it lacks up to date facilities, said Gordon Kearney, a director with Rooney Auctioneers in Limerick.

“Older office accommodation is more difficult to offload,” said Kearney. “Rents are in the region of €85 to €100 per square metre for the Georgian offices.”

An advantage to businesses of renting a suburban location is that they do not have to worry about parking, said Buckley.

“Car parking is generally provided in the suburban accommodation, but for city centre car park spaces in Limerick city centre you would be looking at between €1,500 and €1,750 a space,” he said.


The near future
The problem of limited supply in the different regional city centre areas will be addressed in the next few years. In Cork, the docklands urban renewal project is a large but typical example of future development, with the potential to provide the large amounts of modern office accommodation that businesses are looking for.

“There is a need for more city centre office space in Cork, and the docklands is going to cater for that,” said Hanafin. “The Docklands site is adjoining the main city centre and traditional office locations, so there is huge potential there to provide office space.”

The docklands project will mean a major revamp of Cork city centre and provides space for up to 745,000 square metres of non-residential development. Cork City Council has estimated it will accommodate a working population of up to 25,000 and the first mixed-use planning applications are due to be submitted this summer.

Galway is also set to experience a major increase in available high specification city centre office space.

“There is a major land bank available down in the docks area, right in the city centre,” said Donnellan. “There are plans for major redevelopment in the future there, and this should feed the supply that is there at the moment. It belongs to CIE who have plans to develop it within the next year or two."

The proposed CIE development will encompass about 140,000 square metres and include high-rise office blocks, apartments, hotels and the second biggest enclosed shopping centre in Ireland after Dundrum.

Hanafin said that new developments adding office space to the market will not affect the upward momentum of city centre rents; he expects Docklands rents to be over and above existing rents in the city centre.

“I do not think it will depress rents,” he said. “The quality of office buildings will be higher than what we have seen so far in the city centre and the location is very good.”

Buckley was similarly confident that rents in Limerick would continue to rise over the next three years.

“I think rents around Limerick will continue to rise,” he said. “That is a function of land price and over the last twelve months city centre and suburban land prices have increased 30 or 40 per cent and that, factored with construction costs, can only lead to rental growth if developers are to get required returns.”

Hanafin said that developers were confident enough in demand going forward to build speculatively in suburban Cork locations, knowing that they would be able to fill office space when they put it on the market.

"We are involved as agents for Fota Business Park in Carrigtwohill and there are four buildings being built there, roughly about 9,290 square metres, on a speculative basis,” he said. “Two are let, a third is reserved, and there is one available.”

He added that there is an increasing demand from owner occupiers to purchase floors in multi-storey office buildings.

“That is something that we will probably see more of,” he said.

Pat Kearney said that owner occupiers were also increasingly important in the Limerick office market.

“There are a number of tenants that wish to acquire their own office accommodation,” he said. “Third generation space is first on their list and parking is a prerequisite.”


Northern Ireland
The supply of office space in Belfast is also limited at present. Conor Devine, associate director with BTW Sheills said developers have focused on the residential market in the last few years.

“There are a lot of apartments coming out of the ground in Belfast city centre and that has had an effect on potential office development, particularly speculative office development," he said. "Sites which were originally planned for offices are now planned for residential.”

Devine said that canny developers are now turning towards building office space in Belfast city centre.

“Astute investors are now looking at office for their portfolios as rents are still in and around £129 to £150 a square metre in Belfast," he said. "In regional UK centres like Birmingham, Manchester or Edinburgh, it is all between £172 and £215 per square metre. Due to the lack of supply, astute investors are saying that office rents have to go up, to maybe £172 to £194.”

Devine said that the settling of the political situation in the North, along with accompanying government incentives for inward investment, meant that demand for new office space was growing.

“Because we are a lot cheaper in Belfast than the other regions a lot of North American blue chip companies such as Fujitsu and Northbrook are attracted here,” he said.

Older, peripheral office space in Belfast is proving difficult to let, said Devine.

“There are smaller, three to five thousand square feet properties, available within the city centre, on maybe secondary routes, and there is not a great demand for those," he said. "Landlords are having to do softer deals and take what they can get - maybe £113 a square metre. A lot of the stock that sits on our books would be smaller and older that needs to be refurbished.”

Devine said that demand for good quality office space in Derry was also growing as businesses realised there was value to be had.

“Lagan Developments speculatively built Timber Quay, on the Strand Road in Derry," he said. "They built 5,575 square metres of Grade A high spec offices with large floor plates; it was completed in October 2006 and the building will be fully let by the end of the summer. We are getting £129 a square metre, which 18 months ago would not have been achievable.”