Current thinking among Dublin’s office agents is that the leasing cycle bottomed out in the first quarter and that sharply increased activity in the second quarter represents a turning point. I believe they are right. However, while increased take-up is a necessary first step, there is a distance to travel before vacancy peaks and we can call a full market recovery.
Last year was the slowest for Dublin office leasing since the global financial crisis, and things deteriorated further in Q1 of this year with just 16,300sq m of take-up – about one quarter of the long-term average. In a dormant market, agents were left pondering the impact of remote working and a slowdown in global tech leasing, resulting in very weak sentiment.
However, activity rebounded between April and June, with 86,250sq m of space taken – making Q2 the second busiest quarter for four years. Understandably perhaps, this has lifted the mood and given rise to some quite bullish commentary.
Observers have pointed to one particular transaction as evidence of increasingly favourable dynamics. On the last working day of June, American-Irish fintech Stripe leased One Wilton Park – a prime 14,500sq m office in Dublin 2. This deal reflects important positives but, under detailed scrutiny, it also reveals challenges still facing the market.
Number One was the first of four buildings in Wilton Park that LinkedIn pre-let prior to Covid-19. Unfortunately, by the time these offices were completed, the pandemic and a global tech shock had changed the world. Suddenly over-stocked with accommodation, LinkedIn instructed agents to assign its surplus space. Essentially, this meant finding other occupiers to step in as tenants for the remainder of the lease term.
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Arising from this, One Wilton Park was assigned to Stripe in June, while a further parcel of the LinkedIn space was assigned to EY in July. These transactions have generated positive outcomes. LinkedIn has right-sized its office accommodation, agents have demonstrated their worth by securing blue-chip replacement tenants, and Stripe and EY have acquired high-spec space in a stunning canal-side scheme.
Meanwhile, landlord IPUT, which has been assembling the Wilton Park estate since 1982, will see its vision of a vibrant commercial neighbourhood realised as the offices become populated.
Curiously though, these deals provide mixed news about the overall market. On the positive side, both Stripe and EY are moving because of expansion. These successes reflect aspects of Ireland’s economy that augur well for future office demand. On the other hand, the transactions reflect challenges that are only receding slowly.
Firstly, they shine a light on elevated levels of lease assignment and subletting. After Covid, many organisations were overstocked with business space that they sought to offload. This drove assigned/subleased space from 10 per cent of take-up to a peak of 38 per cent in Q1 2023.
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The glut of so-called “grey” space is gradually being worked through but, including the Stripe deal, assignment/subletting still accounted for one-fifth of Q2 take-up. Moreover, with EY and law firm Addleshaw Goddard taking further grey space in Q3, it remains an ongoing feature of the market. The issue here is that, while assignments and sub-lets boost take-up, they do not subtract from vacant space. Shifting the rent bill from LinkedIn to Stripe added nothing to the quantum of occupied space in the market. Nor, therefore, did it deduct from vacancy.
The second cautionary point is that Stripe is moving within the market. It currently occupies space in The One Building on Grand Canal Street. Unless this office can be quickly re-let, the net effect of Stripe’s deal at Wilton Park will actually be to drive up market vacancy – a second-order effect that the commentary has largely overlooked. This is not an isolated occurrence. Two-thirds of the office space leased in Dublin since the start of 2023 has been taken by occupiers moving from somewhere else.
Agents are correct to label Q1 as the bottom of Dublin’s office leasing cycle. But this does not mean we are out of the woods. Agents focus on take-up because getting leases signed is their primary operational objective.
However, developers, investors and their funders are more interested in vacancy, which determines rents and values. Dublin’s vacancy rate currently exceeds 15 per cent, making the market somewhat oversupplied.
With more than 250,000sq m of new space scheduled to be completed by end-2025, vacancy will rise further unless the quantity and quality of take-up improves sharply. The former would require a resumption of big tech lettings and/or a strengthening return-to-the-office dynamic.
The latter would require lease assignments and movers within the market to trend lower in the lettings mix. There are signs that all of these things are now happening – but too slowly to digest the new space that is coming on stream. So, while things are looking up, it is premature to call a market recovery.
John McCartney is director of research at BNP Paribas Real Estate
