Independent property firm HWBC said that Covid has meant demand for new space has been subdued, but that the lifting of restrictions and successful vaccine rollout has led to a marked increase in tenant activity for the second half of the year.
HWBC's Office Review for the first half of the year shows an 81% decline in take-up of new office space in the past 12 months, which resulted in rent levels softening in the Dublin office market.
HWBC said that prime Dublin city centre rent stood at €57.50 per square foot at June, down 7% compared to last year and at their lowest level in five years.
Just 209,000 sq feet of space was let in the first half of the year.
This compares to 1.1 million in the first six months of 2020 when the impact of Covid was already starting to hit market sentiment during the second quarter.
But assuming no serious Covid variants emerge, HWBC said it expects that 2022 will see a return to more normalised levels of demand activity with transactions back to the long-term average for the market.
This will likely see rents stabilise and then return to growth from 2023 onwards, it added.
"Office space reserved stands at over 800,000 sq ft, and large occupiers such as An Post, TikTok and KMPG are all in advanced discussions for new space," it added.
HWBC noted that the overall market vacancy rate stood at 10.1% by June with a continuing increase in the amount of "grey" space coming to the market.
This is where a company looks to sub-let excess space that is surplus to requirements.
HWBC estimated that this market accounts for around 24% of available city centre space and is appealing to some tenants due to the flexible lease terms on offer.
According to today's report, a total of 5.2 million square feet of new space is under construction.
But the amount of completed space delivered in the first half of the year was down 21% on the previous year.
HWBC noted that delivery was hit by lockdown restrictions on building sites but also the limited supply of materials and skilled personnel in a competitive market.
It noted that there is now very little office space under construction in the suburbs, where rent levels held steady over the past 12 months and a shortage of new office space is expected as demand returns in 2022.
Today's report also found evidence of a flight to quality by tenants who are looking to ensure they lease space in buildings with strong sustainability credentials.
"With awareness of the climate emergency growing, tenants are seeking to minimise their offices' carbon footprint as part of their ESG obligations. Offices with poor green credentials will struggle to compete, and likely require investment in retrofitting if they wish to command higher rents," the property firm said.
HWBC also said that that occupiers are starting to think beyond the pandemic and trying to decide the right blend of office space and remote working to suit their business and staff profile.
"Most companies are targeting September / October to have protocols in place for staff returning to the office and this will lead to increased deal activity over the coming quarters," it added.
"With the office market in effective lockdown since March 2020, there are now increasing signs of pent-up demand from occupiers," Tony Waters, Managing Director of HWBC, said.
"The staggered lifting of Covid restrictions and the successful vaccine rollout has supported a marked increase in tenant activity heading into Q3 which will translate to increased take up for the full year. All the signs are for the market to stablise in 2022, with growth returning from 2023 onwards," he added.
