Occupier Trends Investment Trends Market Outlook

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Research, Q1 2020

Dublin Office Market OverviewWith Special Focus: Impact of Covid-19

Q 1 O V E R V I E WStrong opening start to 2020 masks the severe disruption

to the real estate market that is currently being caused by the outbreak of Covid-19

20

19Q

1 2

02

0

20

182

017

20

162

015

20

142

013

20

122

011

20

1020

09

200

820

07

200

6

€0

€10

€20

€30

€40

€50

€60

€70

€80

Fig 2. Prime office rents € per sq ft per annum

Source: Knight Frank Research

Summary

1. 817,000 sq ft was let in what was the second strongest opening quarter ever

2. The vacancy rate declined to 6.5%, down from 7.0% a quarter earlier

3. The TMT sector was the main driver of activity, comprising 91% of the entire space let

4. €363.9 million worth of office investments changed hands in Q1

5. Real estate markets across the globe hit by Covid-19 exogenous shock

Source: Knight Frank Research Source: Knight Frank Research

P R O P E R T Y T E N A N T S E C T O R S I Z E ( S Q F T )

One & Two South County Business Park, Dublin 18 Mastercard TMT 249,164

Fitzwilliam 28, Dublin 2 Slack TMT 134,656

Stemple Exchange, Blanchards-town Corporate Park, Dublin 15 Guidewire TMT 85,000

Block I, Central Park, Dublin 18 Google TMT 75,294

2WML, Dublin 2 Zalando TMT 47,562

T O P 5 O F F I C E L E A S I N G T R A N S A C T I O N S

OCCUPIER MARKET 817,000 sq ft of office space transacted

in Dublin in Q1 in what was the second

strongest opening quarter on record,

only behind Q1 last year when 1.4

million sq ft was let. The vacancy rate

fell to 6.5% from 7.0% at the end of Q4

while the vacancy rate in the city centre

declined to 5.0% from 5.3% previously.

Occupier activity was driven firmly by

the TMT sector which accounted for

91% of the market. The largest

transaction was Mastercard’s taking

of 249,000 sq ft at One and Two South

County Business Park.

Mastercard is the epitome of the

transition made by many financial

companies towards the technology

sector, with One and Two South

County incorporating a new European

Technology Hub which will develop the

company’s capabilities in areas such

as artificial intelligence, cyber security

and blockchain. The campus style

development is also in tune with recent

trends seen within the technology sector

in Dublin with Microsoft, LinkedIn,

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

20

19

Q1

20

20

20

18

20

17

20

16

20

15

20

14

20

13

Teams over the last year, the company

has the noteworthy distinction of having

a higher stock price at the end of Q1

than at the start and before the Covid-19

turmoil disrupted financial markets.

Other notable deals included Guidewire’s

taking of 85,000 sq ft at Stemple

Exchange, Blanchardstown Corporate

Park, Google’s taking of 75,000 sq ft at

Block I, Central Park and Zalando’s taking

of 48,000 sq ft at 2WML.

In terms of location, 42% of occupier

activity occurred in the City Centre,

marginally ahead of the South Suburbs

on 41%. The West Suburbs and the North

Suburbs accounted for 15% and 2% of

the market respectively. We are holding

prime benchmark rents at €62.50 psf

although risks remain on the downside to

this given the current environment.

DEVELOPMENT MARKETFour projects were completed in Q1

delivering 104,000 sq ft to the market.

The largest of these was Davy Real

Estate’s 45 Mespil Road which comprises

47,000 sq ft, followed by Block D,

Charlemont Exchange which extends to

32,000 sq ft and marks the completion

of the redevelopment of Charlemont

Exchange which now totals 123,000 sq

ft. Blocks A, B and C were completed in

2018 by Marlet – the scheme's previous

owners – before being sold to Vestas

Investment Management in 2019. The

Facebook and Google having led the way

in this regard. One South County was

completed last year while Two South

County is a pre-letting which will be

completed in 2022.

The second largest deal was Slack’s

pre-letting of 135,000 sq ft at Fitzwilliam

28, with delivery of the redeveloped

former ESB headquarters expected

later this year. Slack provides internal

communication software for enterprises

and, although it has been facing

increasing competition from Microsoft

remaining two schemes delivered in Q1

were 61 Thomas Street and 42 Westland

Row which consist of 13,000 sq ft and

11,000 sq ft respectively.

INVESTMENT MARKET €363.9 million worth of Dublin office

investments changed hands in Q1,

representing a 34% increase in comparison

to the same period last year. The largest

transaction was Google’s purchase of

the Treasury Building for €115.5 million.

Google has expanded its footprint in

Dublin considerably such that it now

stands at just over one million sq ft, and

while the Treasury Building is presently

leased to a number of tenants, it will

eventually provide Google with additional

space for its future growth in Dublin.

European purchasers targeted office

assets in Dublin in a considerable way in

Q1, comprising 55% of investor activity

– ahead of buyers from the United States

and Ireland which accounted for 32% and

8% of the market respectively. In addition,

European buyers also purchased four of

the five largest assets that traded during

Q1. AXA IM – Real Assets, in conjunction

with local partners BCP Capital, purchased

La Touche House from Credit Suisse for

€84.3 million. Elsewhere, Arena Invest –

who made their first acquisition in Dublin

in Q1 – paid €54.0 million for Blocks 4

and 5 of the Harcourt Centre which were

originally acquired by Ares and Avestus for

€47.0 million in 2017. Ares and Avestus also

disposed of Classon House – which they

purchased in 2016 for €20.4 million – to

Corum for €29.3 million, while KanAm

bought One Hatch Street from a private

European investor for €35.1 million.

Although outside of the top five

transactions, another high-profile

asset to re-trade was Phoenix House

which was sold to UK-based SW3 for

€16.0 million, having been acquired by

Henley Bartra for €8.3 million in 2018.

It is noteworthy that Blocks 4 and 5 of

the Harcourt Centre, Classon House

and Phoenix House were all acquired

and re-traded within the last four

years, underlining the high liquidity of

the market in recent years. While the

indications in the early stages of Q1 were

that yields were beginning to tighten, we

now believe it is prudent to continue to

hold the prime yield benchmark at 4.0%.

Fig 1. Office take-up Sq ft

Source: Knight Frank Research

€0

€500m

€1,000m

€1,500m

€2,000m

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Fig 3. Dublin office investment volumes

Source: Knight Frank Research

P R O P E R T Y S E L L E R B U Y E R A P P R O X . P R I C E

The Treasury Building, Dublin 2 Jayfield Ltd and Percy Nominees Google €115.5m

La Touche House, Dublin 1 Credit Suisse AXA IM - Real Assets/BCP Capital €84.3m

Blocks 4 & 5, Harcourt Centre, Dublin 2 Avestus/Ares Arena Invest €54.0m

One Hatch Street, Dublin 2 Private European KanAm €35.1m

Classon House, Dundrum Business Park, Dublin 14 Avestus/Ares Corum €29.3m

T O P 5 O F F I C E I N V E S T M E N T T R A N S A C T I O N S

0%

1%

2%

3%

4%

5%

6%

7%

8%

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02

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182

017

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162

015

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142

013

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122

011

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1020

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200

820

07

200

6

Fig 4. Dublin prime office yields

Source: Knight Frank Research

D U B L I N O F F I C E M A R K E T O V E R V I E W Q 1 2 0 2 0 D U B L I N O F F I C E M A R K E T O V E R V I E W Q 1 2 0 2 0

2 3

AMIE

NS STREET

PORTLAND ROW

O’CONNELL STREET

BATH AVENUE

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USHER’S QUAY

ARRAN QUAY

SOUTHCIRCULAR

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DOLPHIN ROAD

SOUTH CIRCULAR ROAD

OLD KILMAINHAM ROADJAMES STREET

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LEESON ST UPPER

NORTH CIRCULAR ROAD

CONYNGHAM ROAD

2WMLRent: Stepped rent rising from

€56.50 psf (2nd Floor) to

€61.00 psf (5th floor)

Take-up: 47,562 sq ft

Tenant: Zalando

Sector: TMT

Fitzwilliam 28Rent: €56.00 psf

Take-up: 134,656 sq ft

Tenant: Slack

Sector: TMT

78 Sir John Rogerson's QuayRent: €53.00 psf

Take-up: 36,954 sq ft

Tenant: Salesforce

Sector: TMT

Note: Sublease

The Bloodstone BuildingRent: €52.00 psf

Take-up: 8,683 sq ft

Tenant: Knotel

Sector: Coworking

Hambledon House Rent: €45.00 psf

Take-up: 5,704 sq ft

Tenant: Kane Tuohy

Sector: Professional Services

Phoenix HouseYield: 5.75%

Price: €16,000,000

Purchaser: SW3

61 Thomas StreetType: Redevelopment

Owner: Oakmount

Space Delivered: 13,000 sq ft

1 Fitzwilliam 28 €56.00 psf 134,656 sq ft Slack TMT

3 One Park Place N/A 42,893 sq ft Dropbox TMT

4 78 Sir John Rogersons Quay €53.00 psf 36,954 sq ft Salesforce TMT Sublease

5 The Harcourt Buildings €59.00 psf 14,236 sq ft Nuance Communications TMT Sublease

6 St James House €45.42 psf 9,141 sq ft SEI Investments Finance Sublease

7 The Bloodstone Building €52.00 psf 8,683 sq ft Knotel Coworking

8 Ashford House €45.00 psf 8,389 sq ft Knotel Coworking

9 45 Mespil Road N/A 8,041 sq ft Ellucian TMT

10 Hambledon House €45.00 psf 5,704 sq ft Kane Tuohy Professional Services

45 Mespil RoadRent: N/A

Take-up: 8,041 sq ft

Tenant: Ellucian

Sector: TMT

42 Westland RowType: Redevelopment

Owner: James & Patrick Dooley

Space Delivered: 11,431 sq ft

45 Mespil RoadType: Refurbishment

Owner: Davy Real Estate

Space Delivered: 47,456 sq ft

Ashford HouseRent: €45.00 psf

Take-up: 8,389 sq ft

Tenant: Knotel

Sector: Coworking

Block 4 & 5, Harcourt CentreYield: 5.09%

Price: €54,000,000

Purchaser: Arena Invest

One Hatch StreetYield: 4.01%

Price: €35,100,000

Purchaser: KanAm

The Treasury BuildingYield: 4.32%

Price: €115,470,000

Purchaser: Google

Stack BYield: 4.18%

Price: €16,000,000

Purchaser: Trinity College Dublin

La Touche HouseYield: 5.31%

Price: €84,250,000

Purchaser: AXA IM –

Real Assets/BCP Capital

St James HouseRent: €48.00 psf

Take-up: 9,141 sq ft

Tenant: SEI Investments

Sector: Finance

Note: Sublease

The Harcourt BuildingsRent: €59.00 psf

Take-up: 14,236 sq ft

Tenant: Nuance Communications

Sector: TMT

Note: Sublease

Block D, Charlemont ExchangeType: Refurbishment

Owner: Vestas Investment Management

Space Delivered: 31,684 sq ft

One Park PlaceRent: N/A

Take-up: 42,893 sq ft

Tenant: Dropbox

Sector: TMT

TRINITY COLLEGEDUBLIN

S

CONNOLLYSTATION

THECONVENTION

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GRAFTONSTREET

ST STEPHEN’SGREEN

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GRAND CANALENERGY THEATRE

AVIVA STADIUM

GOVERNMENTBUILDINGS

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PHOENIXPARK

HEUSTONSTATION

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DART RAIL LINE

KEY

DEVELOPMENTS

INVESTMENTS

LETTINGS

LUAS TRAM LINE

LUAS TRAM LINE

T O P L E T T I N G S , I N V E S T M E N T S A N D D E V E L O P M E N T S I N Q 1

D U B L I N O F F I C E M A R K E T O V E R V I E W Q 1 2 0 2 0 D U B L I N O F F I C E M A R K E T O V E R V I E W Q 1 2 0 2 0

4 5

USEurope

Ireland UKREIT Asia

18%

20%

13%

9%23%

16%

USIreland

Europe UKREIT Asia

18%

20%

13%

9%23%

16%

South Suburbs 45%City Centre 30%West Surburbs 9%

Source: Data source

Label61%Label11%

Label29%

HeadlineSubtitle

7%

8%

9%

NORTHSURBURBS

WESTSUBURBS

FRINGE

TMTStateFinanceProfessional services

PharmaCoworkingOther

TMT – 91%Finance – 4%Coworking – 2%Medical – 2%Other – 1%

CONTEXTThe global spread of Covid-19 in Q1

ignited huge volatility in the world’s

financial markets with the CBOE

Volatility Index, also known as the

VIX, recording its highest ever level

in March.

The Dow Jones fell by 23.2% in

Q1, making it the worst quarterly

performance since 1987 and the worst Q1

on record while the Irish stock market

(ISEQ) fell by 28.4%. The price of crude

oil fell by two thirds making it the worst

ever quarterly performance with March

also having the distinction of being the

worst monthly performance on record.

The global indirect property market was

not spared, with the S&P Global REIT

benchmark falling by 29.6%.

These swings in the financial

environment will obviously have

significant ramifications for the Dublin

office occupier and investment markets.

Less obvious is what those ramifications

will be. Nevertheless, in this special

focus, we give our initial views on what is

a fast and continually evolving situation.

WHAT IS DRIVING THE VOLATILITY?Uncertainty regarding how long

economic restrictions are likely to

remain in place is the key factor driving

current market volatility. Currently,

there is a wide range of estimates among

market participants regarding how long

the present lockdown will last. Without

a consensus regarding a timeline back

to normality, it is very hard to assess

the full impact and reliably underwrite

the risk associated with assets. Global

volatility is likely to remain elevated for

some time but will reduce as a path out

of the crisis becomes clearer.

In Ireland’s case, we can turn to

comments made recently by Dr. Cillian

De Gascun, who is the Chair of the

Covid-19 Expert Advisory Group to

the Health Service Executive. When

asked whether twelve weeks was an

optimistic timeline for the Government’s

COVID-19 Income Support Scheme to

last, he suggested a three to six month

period would be more realistic. For their

part, The Central Bank of Ireland have

released a provisional estimate for a

8.3% contraction in GDP in 2020, but that

is predicated on containment restrictions

lasting three months which is at the lower

bound of the likely impact. Even under

that scenario, the deficit as a percentage

of GNI* will reach 10.7% in 2020.

The early stages of this crisis saw

sovereign yields across Europe spike

before the ECB stepped in with a €750

billion Pandemic Emergency Purchase

Programme. The question of how the

emergency response to Covid-19 will be

paid for has not gone away however, and

is a topic that is likely to come to the fore

in European politics when the medical

emergency wanes. This could have wider

implications for the bloc's future.

IMPACT ON THE INVESTMENT MARKETEvidence from publically traded real

estate companies, both domestically

and abroad, would suggest that there

will be a material impact on prices in

the direct property investment market.

In practice, however, we are unlikely to

see transactions take place until we are

emerging from this crisis at which point

S P E C I A L F O C U S : I M P A C T O F C O V I D - 1 9

the financial markets may be much

further along the road to recovery which

would insulate real estate from much

of the volatility. Nevertheless, if equity

prices remain significantly below where

they were when we entered this crisis, we

may see rebalancing activity as the large

multi-asset portfolio managers seek to

dispose of some their real estate holdings

in order to keep their portfolio exposure

at the targeted risk-return level.

However, it is worth remembering that

Dublin’s office investor base is extremely

well diversified internationally with the

resulting pooling of risk increasing the

market’s resilience. Much of the capital

that has invested in the Dublin office

sector is long-term stable income focused

and well capitalised to weather short-

term fluctuations in the market. While

rents may be adversely affected, this is

mitigated somewhat by the increasing

use of capped/collar and indexed rent

reviews, although the majority are still

open market reviews. Furthermore, talk

of late cycle investing was dominating

the market and many were positioning

their portfolio for end of cycle risks and

taking a more defensive stance even

before Covid-19 arrived.

Looking ahead, much of the stock of

prime assets in Dublin have already

been purchased by long-term core

investors meaning competition for such

assets that are brought to the market for

sale will remain strong. In recent years,

the main source of prime investment

product has been new builds. However,

with construction halted, the supply

of opportunities will dwindle which

will support values for standing assets.

Given the pressure on corporate debt

that is emerging and the importance of

tenant liquidity in weathering the current

uncertainty, investment grade tenants

with continued access to capital markets

will be especially valued. The yield spread

between prime assets with long unexpired

terms and riskier strategies with active

management will widen further.

IMPACT ON THE OFFICE MARKETSome feel that the office sector is uniquely

exposed to the Covid-19 crisis as it has

turbo charged the secular trend towards

remote working with detrimental

consequences for the office market.

Indeed, we can see in Fig. 8 the gains that

remote working stocks have made in Q1,

going against the overall decline seen in

the S&P 500.

While we do envisage an increase in remote

working, we see it complementing rather

than replacing office space with employees

given greater flexibility to work remotely

one or two days a week. Overall, however,

we believe that the current crisis has

underlined the value of the office as a

place of collaboration and socialisation

for employers and employees.

Companies have long learned that real

estate is a key business infrastructure

for driving productivity that more than

outweighs the direct real estate cost.

We have seen predictions of technology

heralding the demise of the office

before. Back in the 1990’s, it was

predicted that the introduction of the

internet and email to the work place

would lead to companies moving to

cheaper suburban offices as the need

for face-to-face communication would

be negated. However, it was discovered

that the more people communicated

using technology, the more they wanted

to meet-up in person, which resulted in

the reversion of occupier demand to city

centre locations, especially from tech

companies themselves.

In the same way, demand for physical

offices will remain despite the

experiment in remote working that

we are all undertaking at this time. It

is also why Slack, one of the leading

providers of remote working software,

expanded into 135,000 sq ft of new

office space at Fitzwilliam 28 in what

was the second largest deal of Q1.

50.070.090.0110.0130.0150.0170.0190.0210.0230.0250.0

1/1/

190

0

1/4

/19

00

1/7/

190

0

1/10

/19

00

1/13

/19

00

1/16

/19

00

1/19

/19

00

1/22

/19

00

1/25

/19

00

1/28

/19

00

1/3

1/19

00

2/3

/19

00

2/6

/19

00

2/9

/19

00

2/12

/190

0

2/15

/190

0

2/18

/190

0

2/21

/190

0

2/24

/190

0

2/27

/190

0

3/1

/19

00

Zoom RingCentral Slack Docusign S&P 500 Index

Zoom RingCentral Slack Docusign S&P 500 Index

50

70

90

110

130

150

170

190

210

230

250

Mar 2020Feb 2020Jan 2020

0

10

20

30

40

50

60

70

80

90

200

520

06

20

07

200

820

09

20

102

011

20

122

013

20

142

015

20

162

017

20

182

019

20

20

Source: CBOE Volatility Index

Fig 5. Volatility Index

Source: Knight Frank Research

Fig 7. Dublin office buyers by origin 2013 - Q1 2020

-45% -40% -35% -30% -25% -20% -15% -10% -5% 0%

Australia

Italy

France

Spain

Europe

US

UK

Asia Pacific

Canada

Germany

Hong Kong

Singapore-17.7%

-19.8%

-20.9%

-28.0%

-28.2%

-28.4%

-29.8%

-34.7%

-36.3%

-36.8%

-39.5%

-40.4%

Source: Various

Fig 6. Q1 Performance of REITs globally Fig 8. Remote working stocks

Source: S&P

D U B L I N O F F I C E M A R K E T O V E R V I E W Q 1 2 0 2 0 D U B L I N O F F I C E M A R K E T O V E R V I E W Q 1 2 0 2 0

6 7

Brexit Under Pressure #3 - March 2020

The London Report 2020

© 2019 HT Meagher O’Reilly trading as Knight FrankImportant Notice: This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by HT Meagher O’Reilly trading as Knight Frank for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of HT Meagher O’Reilly trading as Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of HT Meagher O’Reilly trading as Knight Frank to the form and content within which it appears. HT Meagher O’Reilly trading as Knight Frank, Registered in Ireland No. 385044, PSR Reg. No. 001266. HT Meagher O’Reilly New Homes Limited trading as Knight Frank, Registered in Ireland No. 428289, PSR Reg. No. 001880. Registered Office – 20–21 Upper Pembroke Street, Dublin 2.

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BREXITWHAT WILL ITS IMPACT BE ON

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