Flight to quality in resurgent market

Office property has proven to be just as resilient as the economy as the market recovers from Covid. writes Joanne Hunt

If everyone is working from home, why are companies still clambering for office space? Indeed, reports of the death of the office are premature, experts say as employers continue to compete for the best digs. At the height of the pandemic, predictions of a permanent move to remote working sent shudders through the commercial property market. Turning out the lights on millions of square feet of office space for almost two years will do that.

Pronouncements early on by trendsetting employers like Twitter that its 5,000 employees worldwide could work from home full-time “forever” didn’t help. Other employers kept schtum about their long-term work policies, paid rent on near empty buildings and sat on office expansion plans. Government guidance that staff should work from home remained in place until the end of January. Some companies have chosen to embrace remote working on a permanent basis, or to at least let employees themselves decide how they want to work. Pioneers in the space include Liberty Insurance, eBay, and Shopify. For everyone else, the drift back to the office has been slow, with HR directors careful not to spook the horses. Pent up demand for space and what some call the biggest hiring spree since the Celtic Tiger have led to some big office deals. “If we look back on 2020 and 2021, the take up was probably between 1.6 million sq ft and 1.7 million sq ft each year and majority of take up was quarter one pre-Covid and quarter four of 2021 when there was high level of pent up demand,” says director of office at Savills, Shane Duffy.

“Rents fell a little, but not as much as the doomers and gloomers said,” says Joan Henry, chief economist and head of research at Knight Frank. “They only fell to €57.50 for prime rent per square foot and there was big demand for space in the city in Dublin 2 on the South Docks and North Docks which is what happens in a downturn. Obviously if prices fall a bit, you are going to want to go and get yourself the very best.” Early movers on the Dublin scene included TikTok which signed a deal at the end of November to locate up to 2,000 staff to the Sorting Office on Dublin’s south docks on a 15-year lease. The rental level agreed for the office scheme is understood to be between €55 and €60 per sq ft. In December, KPMG exchanged contracts with Hibernia Reit for the development of its new Irish headquarters at Harcourt Square in Dublin 2. The firm, which employs more than 3,800 people in Dublin, will move to the 288,500sq ft development in 2026. The headline rent works out at €57.75 per sq ft with the net effective rent being just over €48 per sq ft. KPMG also has options to lease up to a further 48,500sq ft on the same terms. In March, TikTok was reported to be in talks to rent a further 257,000sq ft of office accommodation at the Shipping Office scheme and the Tropical Fruit Warehouse in Dublin’s south Docklands on a 12-year lease at a rental level of €60 per sq ft. These spaces could accommodate a further 2,500 workers.

Indeed, companies signed on the dotted line for over 470,000sq ft of office space in the first three months of this year, according to Knight Frank. Some 75 per cent of the new office space due to be delivered throughout the rest of this year was already pre-let, according to its quarter one office market report. This drive for more office space doesn’t necessarily mean that homeworking is over, however. The overriding factor is an increase in staff numbers, says Henry of Knight Frank. “The economy has weathered the Covid storm much better than anyone anticipated. It has excelled during lockdown. Lots more jobs have been created and this is creating a solid base for office demand.” It’s exactly the traditionally office leaning sectors that are booming. There are now over 70,000 more people employed in the ICT and professional services sectors compared to the end of 2019, and another 18,000 more in financial services, insurance and real estate. “Even if some companies in some sectors are not taking as much office space, this is being compensated for by job creation and space requirements in other areas,” says Henry.



The hybrid office

Hybrid working, that is some days in the office and some at home, existed before the pandemic but has now gone mainstream. Some 90 per cent of those aged between 35 and 44 who can work remotely said they would like to do so when pandemic restrictions end, a survey by the Central Statistics Office (CSO) found. In a red hot jobs market, employers who are rigid about office attendance will simply lose staff and limit their ability to replace them. Though some form of hybrid working will be a given in most organisations, this doesn’t necessarily equate to less office space, property pundits predict. In expanding companies, more people means more space, even if everyone isn’t in the office at the same time. Office layouts however are likely to look a bit different. “We are going to see a lot more of a collaborative-type environment,” says Duffy from Savills. “The idea of linear desks and coming in and sitting at your desk from 9am - 5pm is an antiquated model. That was happening pre-Covid anyway, now it has been expedited,” he says. When it comes to how the pandemic has shaped their office space wish lists, he sees employers now putting a much bigger emphasis on wellbeing. “There is a big focus on outdoor areas, terrace areas, courtyards or just a convenient park - anything that allows staff to get outside to mingle and to congregate.” Proximity to transport was always a priority and it remains top of the list for companies trying to lure staff back to a commute.

The city and CBD is emerging as the location of choice, says Duffy. “The suburbs have not seen that post-Covid bounce, even in areas like the primary suburban location of Dublin 18, it just hasn’t seen the same level of demand.” To attract workers back in, the city is potentially more enticing, offering greater differentiation to working from home, than a business park location. The office is less and less about a desk, agrees Keith O’Neill, head of office agency at BNP Paribas Real Estate The point of being there now is not solo work, but collaboration. “There is now a lot of collaborative and ancillary space to your workstation. You are not as heavily dependent on the desk itself. There are a lot more very good meeting spaces,” he says or revised layouts. The idea of the bulk of employees lunching together at the same time every day has passed its peak too. “Instead of having one large depressing canteen, you will have multiple tea docks where there can be collaboration on a small level within teams. It’s about creating a collaborative culture,” he says. Most companies are planning for some form of hybrid working, says Knight Frank director, Dan Shannon. This is not having a material impact on the amount of space they need, but it is shaping how they use the space. “You might not have the same amount of fixed space, but you could see companies having a greater emphasis on breakout areas, meeting spaces and private spaces for phone calls.”

Sustainability

Getting workers back to the office, even on a hybrid basis, is a tough sales job. More than ever, the office needs to be an attractive proposition for existing employees as well as those you are competing to hire. Mastercard in Leopardstown, Salesforce in the North Docklands and Facebook in Ballsbridge are all cited by O’Neill as examples of companies paying to create compelling, campus-style work environments in great locations. “Companies are not investing millions in these buildings for no one to be in them. You will see buildings being occupied a minimum of certainly three days a week. They can’t invest in these structures and have everybody at home all the time, it defeats the purpose,” he says. With increasing focus on the environmental impact of doing business, companies want their offices to send the right message too. Office rents that may have dipped during the pandemic are back up for the right building. “Brand new, grade A sustainable stock that is being delivered to the market this year is getting premium rent,” says O’Neill. “Corporates want to be seen to be in energy efficient, sustainable buildings and in that instance, rents are increasing because there is not that much of that highly sustainable product around.” Where there is a lease break or expiry, companies are relocating to more sustainable buildings, says Shane Duffy. The knock-on effect is that it leaves a lot of older stock behind. While grade A buildings are attracting longer lease terms, some of up to 12 years, landlords are offering more flexibility with older stock. Promotional materials for 60 Dawson Street, 145,000sq ft of Grade A office space in the heart of the capital are certainly written to chime with the post-pandemic zeitgeist. The words ‘sustainability’, ‘occupier wellbeing’, ‘‘touch-free entry’ and ‘open air terraces’ namecheck everything you’d expect employers and employees to want after a global pandemic. There is definitely an emphasis now on quality, says Shannon of Knight Frank. “There is a flight to quality. Companies aren’t settling for a second-tier space. They are all striving to be in better, newer buildings. It’s part of encouraging people back into the office and attracting people in a very tight labour market.”