Almost half of the office space leased in Dublin in Q4 2016 is yet to be constructed. This accounted for 44% of all Dublin office space leased during that time and a whopper 61% of the market in Dublin 2 and 4 where the demand for office space is the hottest.
This practice is somewhat of a new phenomena to the Irish market with pre-lets never really featuring before, even during the Celtic Tiger. It is likely that this was due to the relatively small size of the lettings by internal standards.
A pre-let is a contract between a potential tenant and a commercial property developer which allows the tenant to agree to lease a building before the construction has started. Most likely to occur when there is a shortage of commercial property buildings on the market, entering into a pre-let holds both pros and cons for the parties that are involved.
- Tenants can often negotiate generous rent-free periods, discounted rent or other incentives.
- Tenants can specify a precise design and finish and incorporate specialist equipment (if necessary) rather than having to retro-fit it.
- Tenants will have the kudos of having a building constructed solely for it.
- The landlord will be able to obtain a lower cost of funding for the project due to the reduced risk.
- The element of ‘speculative development’ is removed and if the property is constructed to a unique design with specialist equipment, it is likely the tenant will remain in occupation for a long time
- In a rising market, it is likely the agreed rent (at the outset) will be significantly lower than market levels (known as ‘profit rent’ and of distinct benefit to a tenant).
- In a falling market, a rent figure agreed at the outset might be higher than market values.
- There is a large element of risk to the potential tenant in project over-run. The prospective occupier might be heavily dependent on a particular completion date to tie-in with a lease expiry on a current property.
- There is the risk of problems in agreed specification. The tenant might be unwilling to take the property on because of an error in specification.
- The tenant might end up with less flexibility in freeing-up unneeded space.
- The landlord might be faced with lower occupational rent, making the project less viable.
Commercial Property Consultants Savills have noted that rents for pre-let offices are currently trading at a discount to rents on space for immediate occupation. This reflects the fact that some developers may be willing to offer competitive rent deals to ensure their projects get funded and completed within the current cycle. Looking ahead, however, this trend may begin to reverse as completions of speculatively built office blocks provide more tangible competition for pre-lets.
Prelet deals account for nearly half of leased Dublin offices Study reveals spike in preletting commitments amid scarcity of prime business space