Office Market 2022

Decision-makers must assess whether the proposed new office space is sustainable, energy efficient and in line with the company’s ESG (Environmental, Social, and Governance) agenda, aspiration, and philosophy. This is particularly important given that the global property sector is responsible for nearly 40pc of global carbon dioxide emissions.

Secondly, keen consideration is being given to soaring build costs, and whether it is financially viable and/or prudent to incur the fitout costs of particular office space.

Board approval is unlikely if the answer to either of these questions is no. For this reason, 2022 saw the office market evolve into two distinct markets: the new ESG stock constructed in recent years; and the short-term flex market providing turnkey fitted office space. A stark reality for landlords is that there is no in-between.

Take-Up

Take-up of Dublin office space reached close to 165,000 square meters in the first three quarters of the year - with expectations that it will come close to matching the ten-year average of 240,000 square meters by the end of the year.

More office lettings than the entire of 2021 and 2020 were witnessed in the first three quarters of 2022 alone. Most of the activity is in the traditional central business district (CBD) - with over 81pc of market activity occurring in the city.

The release of pent-up demand across the Dublin office market dominated the first six month of 2022, with many businesses relocating or expanding – after such moves had been put on hold during the pandemic. Premium headline rent in key locations did little to deter interest - as the war for talented staff took precedence.  Retention and recruitment strategies saw many companies prepared to rent the best buildings in the best locations – even when this came at a price. Headline rents of €67 and €68 per square foot were secured on new office developments on 60 Dawson Street and 20 Kildare Street.

In Dublin’s South Docks, TikTok’s agreement to lease over 8,000 square meters at the Tropical Fruit Warehouse further underpins that area’s key strategic importance for many tech firms in Dublin. 

This year also observed a welcome return of leases for larger office spaces - with deals for ten lettings over 5,000 square meters already over the line, and at least three more due to be complete before the end of the year.

Emerging Sublet Stock

The dominant theme of the third quarter of the year was the emergence of high-quality sublet space across the market, with tech occupiers particularly active as they reconsider their office footprint globally. Commentators have been quick to attribute this to the impact of working-from-home (WFH) – as more companies adopt WFH policies. It is more likely, however, that many of these decisions to sublet are a result of the economic headwinds that are evidently beginning to bite. High-profile companies such as Linkedin, WIX, Justeat - who struck lease agreements during the pandemic are now looking to offload recently acquired office space.

This sublet space will help the many occupiers who do not wish to commit to a long-term lease or incur significant capital expenditure on a fitout.

We are already seeing some of the better-quality sublet space being taken up and we expect much of it to be leased throughout 2023/24. 

Outlook

One key question for 2023 is whether the headline rents achieved in 2022 will be sustained as vacancy rates increase, occupier demand eases and more sublet opportunities – also known as “grey space” – come on stream.

Despite cautious sentiment, the key office market variables around take-up, rents, reserved tallies, vacancy, and demand, all remain relatively positive, notwithstanding the outlook for the tech sector which remains ominous and will impact demand across the Dublin office market, which is quite reliant on this area.

Despite the economic headwinds, the amount of office space currently reserved and going through the legal stages is close to 1.5 million square feet – which is encouraging. It is telling that the three largest office space requirements on the market at present stem from the professional services firms Mason Hayes Curran, EY and Deloitte - reflecting the fact that tech aside, other sectors have proven resilient and will be a source of healthy demand for office space in the New Year.

2023 shuld also see many companies relocating from older buildings to ESG-compliant spaces - as dictated by their respective corporate agendas. As older buildings are vacated, this may present refurbishment opportunities to the owners of such buildings.

One occupier largely absent from these relocation discussions at present is the State - which occupies many older, non-ESG compliant buildings around the city but does not seem to be actively seeking new sustainable office space. Given it is the State that is largely driving the carbon neutral agenda, we expect this to change.

Otherwise, we expect ESG-compliant office space and flex office space to continue to dominate take-up activity across the market in 2023.

While the WFH agenda will undoubtedly continue to impact demand, it would be remiss to suggest anything other than a reduced office footprint for many companies in 2023. However, the office will continue to be the epicentre of business activity and a hub for learning, collaboration, and collegiality – no business can survive without this.

Shane Duffy is a Director in the Offices Division at Savills Ireland