IT sector continues to drive office market 02.10.2012Twitter’s recent announcement to establish an international office in Dublin has reinforced Ireland’s position as a hub for US IT companies looking to set up bases in Europe. Despite the on-going economic doom and gloom, the Dublin office market continues to perform relatively well and the take-up of space has increased significantly from the same period last year. Take-up year to date is approximately 85,000 sq m and a further 25,000 sq m has already been reserved. Total take-up for the year is expected to reach in the region of 150,000 sq m and when this figure is compared to 2010 (120,000 sq m) and 2009 (85,000 sq m) there is cause for some optimism. The overall vacancy rate in Dublin now stands at 20% which represents a drop of 3% from the start of the year and with no development pipeline and prime space filling up, there is a consensus that the market might begin to turn in favour of landlords in the medium term. Unsurprisingly, demand year to date continues to be led by the IT sector who accounted for a staggering 50% of the take-up. Silicon Valley giants such LinkedIn and Zynga have all concluded significant deals in the city this year. However, it is worth noting that a number of established IT companies have also announced major expansions recently. Facebook for instance continue to expand at their European HQ at Hanover Reach while PayPal recently announced a further 200 jobs at their Blanchardstown offices. However not all activity is based in Dublin. Gaming giant ZeniMax have followed EA Games into Galway and are in the process of acquiring approximately 4,000 sq m offices. In fact Bioware Ireland (a subsidiary of EA Games) have just announced the creation of 200 jobs at their customer service base in the city. Elsewhere in Galway, Hewlett Packard recently announced a new requirement for 8,500- 10,000 sq. m and have requested proposals from developers for “design and build” opportunities as the existing office stock cannot accommodate a requirement of this size. Apple are also reported to be expanding in Cork with the creation of a further 350 jobs. A trip to the IDA website reveals a broad range of IT companies either setting up or on the expansion trail all over the country (Gilte Group- 150 new jobs in Limerick and Dublin; Citrix- 50 new jobs Dublin; Marketo- 150 new jobs Dublin; SAP- 100 new jobs Dublin; Aruba- 40 new jobs Cork; Quest- 150 new jobs Cork; VMware 250 new jobs Cork). Importantly this good news should go some way to offset the recent devastating job losses in Carrick-On-Shannon (Bank of America), Waterford (Talk Talk) and Dublin (Pocket Kings). Through both purchases and lettings, search engine giant Google has transacted approximately 50,000 sq m of office deals in the past 18 months. So why have they decided to commit to Dublin in spite of the economic backdrop? There are a number of reasons- As is widely reported, Ireland’s Corporation Tax on trading profits at 12.5% is the lowest in Eurozone. This is the single most important incentive to attract FDI here and it is imperative that the Irish Government does not agree to change the rate as part of any EU bailout agreement. We continue to boast a young well educated and highly motivated workforce. Ironically recruitment competition between rival IT companies has now becoming an issue and a number of skilled employees are being recruited from abroad. There are obvious benefits to having an English speaking workforce with a legal system similar to that of the US and UK. In fact the more competitive environment has resulted in renewed interest from call centre operators to set up here. Despite the recent Talk Talk announcement, we are aware of a large US call centre operator with a requirement for 10,000 sq m offices which by our calculations could create 800-1,000 new jobs. Finally, from an operating cost point of view, it is worth noting that prime office rental levels have dropped by 50% since 2007. Indicative deal levels for prime office space have remained stable and range from €280 to €320 per sq m in Dublin city centre. It is worth noting that significant rent free periods and more flexible lease terms in favour of tenants remain a feature of the market. Lease terms are now typically 5 years or longer with break options at five yearly intervals. Tenants can still expect rent free periods of 9-12 months depending on the levels of fit-out and the lease terms they are willing to commit to. We see this trend continuing in the short term but as the Class A space fills up the level in incentives should reduce. It is also important to note that potentially onerous “upward only” rent review clauses have been banned from all new lease agreements since February 2010. The current controversy surrounding the impending rent review legislation only applies to lease agreements signed before this date. With approximately 100,000 sq m of active requirements currently reported in the market, the outlook for the future may not be as bleak as some might think.