INDUSTRIAL RENTS AND VALUES APPEAR TO BE STABILISING
Without doubt 2009 has been a most challenging year for the industrial sector, with activity subdued compared to previous years.
The year got off to a relatively slow start with take-up of only 17,627 square metres recorded in the Dublin market in the first three months of the year, down 45 per cent on the final quarter of 2008.This coincided with the weakest quarter in terms of economic performance.
Take-up dramatically improved in the second quarter of the year, reaching 36,121 square metres, but these figures were skewed by a large pre-let of 16,000 square metres in south-west Dublin. The third quarter saw a more robust performance, at 26,000 square metres.
Although down on the previous quarter, there were almost 40 transactions completed in the three-month period. The majority of these transactions comprised small lettings - in fact there were only eight transactions of more than 2,500 square metres completed in the first nine months of 2009. In total, we expect take-up in the Dublin industrial market will reach no more than 100,000 square metres during 2009.
A noticeable shift in trend in the industrial sector during 2009 was the transition from sales towards lettings, with 84 per cent of the total take-up in the Dublin industrial market in the first nine months of 2009 comprising lettings. Only two years ago the reverse was the case, with only 10 per cent of industrial transactions in the capital comprising lettings, with industrial occupiers primarily purchasing premises.
This year we also witnessed a noticeable increase in demand for short-term lettings, as industrial tenants became more cautious and were less willing to commit to long-term leases. This trend is likely to continue in 2010.
A considerable portion of industrial sites were bought in recent years with a view to demolishing the older industrial buildings and developing the sites for higher alternative uses such as retail or apartments.
Due to the downturn, most of these proposals are on hold and the existing buildings are now being put back on the market to let on a short-term basis in order to generate some income. This has had the obvious effect of driving up vacancy levels, which stand at approximately 18 per cent.
Therefore - as is the case in the office sector - while the vacancy rate is high, it is important to note that included in this is a large amount of older, functionally obsolete stock.
Like occupiers in many other sectors, industrial occupiers in 2009 were hugely focused on cost reduction. Many occupiers spent time consolidating their operations or attempting to renegotiate their leases in an effort to cut costs.
As the supply of industrial stock increased and demand weakened, further tenant inducements were offered in order to secure new lettings.
These included additional break options, rent-free periods, stepped rents as well as let-to-buy options. Prime rental levels in the industrial sector stood at €112 per square metre at the beginning of the year and are in the region of €96.90 per square metre, which equates to a 15 per cent decline in 2009 and a decline of approximately 30 per cent from peak to trough.
The decline in secondary rents is more dramatic for larger lot sizes of more than 25,000 square metres, which have experienced a fall of more than 40 per cent from peak to trough. The vast majority of secondary stock transacted this year has been agreed at discounted rental levels, with tenants taking advantage of the market as it adjusts to the new economic environment.
While most of the rental decline has already taken place in this sector, downward pressures remain, particularly for older buildings or industrial premises along routes with significant excess supply. This year, like last year, saw no speculative development, and we would not foresee any taking place until such a time as the current level of prime stock is sufficiently reduced and development funding is more readily available.
That said, there may be further new development next year, but we would expect that this would be on a design-and build basis.
Due to the lack of sales transactions, it is difficult to quantify where capital values are. However, we estimate that prime new accommodation extending to approximately 2,000 square metres in south-west Dublin along the N7 corridor would achieve in the region of €1,400 per square metre. A similar facility in northwest Dublin along the N3 corridor would most likely achieve in the region of €1,240 per square metre at present.
The industrial land market was all but frozen over the past year, with only a few off-market transactions concluded. There is no doubt that industrial land has taken a sizeable hit, but just what size of a hit is extremely difficult to quantify, as there is a distinct lack of transactional evidence.
We are hugely concerned about the proposed 80 per cent windfall tax on land rezoning in the forthcoming Nama legislation, as it will potentially have huge implications for the industrial sector as it currently stands.
The south-west N7 corridor (Naas Road) continued to dominate the take-up figures in 2009, accounting for 41 per cent of total take-up in the first three quarters of the year. The south-west N81 corridor accounted for 16per cent of take-up in this sector, with the north-east M1 corridor accounting for 15 per cent and the north-west N3 corridor only accounting for 10 per cent of total take-up in the year.
Unfortunately, there were a number of high-profile multinationals announcing closures during 2009, including Waterford Wedgwood in Waterford and Dell in Limerick. There were also a number of lay-offs and cost-cutting exercises, albeit on a smaller scale.
Ericsson, IBM, Boston Scientific, Celestica and Fidelity Investments are all laying off staff, while several large multi-nationals have outlined plans for global cuts without specifying the effect in Ireland. This has led to an increase in the supply of specialist facilities becoming available around the country.
That said, the manufacturing element of the industrial sector managed relatively well over the past year. As of the end of the third quarter, industrial production was up 4 per cent from the previous quarter, according to estimates from the Central Statistics Office (CSO).
Since December 2008, Irish production has risen by 12.4 per cent, adjusting for seasonal variations. The headline figures from the CSO mask quite a divergence in fortunes between the more traditional, manufacturing-based industries which continue to suffer and the ‘‘modern’’ manufacturing of hi-tech bio, pharmaceutical and R&D based industries, which continue to perform strongly.
Another positive within the sector is the establishment of Ireland as a data centre hub, and we may see some new entrants to this specialised sector in 2010.
Microsoft opened its €341 million state of the art, 28,100 square metre data centre at the Grange Castle Business Park in south-west Dublin this year, proving Ireland is still attractive due to a number of factors including climate, fibre connectivity and our competitive tax system.
At this point, although rents and values appear to be stabilising at current levels having come under huge pressure during 2009, it looks like 2010 will be another challenging year for the industrial sector.
With potential occupiers delaying decisions until such time as there is clear evidence of economic recovery, take-up of industrial accommodation in the Dublin market is unlikely to exceed 100,000 square metres. That said, a few large transactions could see this figure being exceeded.
This article appeared in the Sunday Business Post printed edition, 29th November 2009.
For Further Information please contact
Dierctor Industrial Agency, CBRE
t: + 353 1 618 5500