Vacancy In Dublin's Squeezed SME Industrial Space Hits New Lows

They may not be at the top of investors’ logistics shopping lists or as flashy or headline-grabbing as the latest Amazon fulfillment centre, but a supply crunch in Dublin’s small-scale industrial spaces could provide an example of the lack of space across Ireland’s wider real estate economy — and provide stellar rental growth for owners. 

According to one pan-European investor, the Irish CRE market needs to urgently increase the number of small units or see an acute space crunch in the near term.

“Development is concentrated on units of 20K SF-plus, with little to no development sub this size,” M7 Real Estate asset manager James Smith said.

“Where there used to be a relatively healthy supply correlating to vacancy rate in this size bracket, it would be my view that there will come a pinch point over the next 12 months for the SME sector to secure space.”

The space shortage has affected all levels of the industrial market. According to latest data from Savills, Dublin has just over a dozen units of around 20K SF available, with almost half of those considered old stock.

“In Dublin there’s only 15 units of 20K SF in the market at the moment.” Savills Ireland Director of Research John Ring said. 

“Of those, nine units are actually quite old. The majority of them are from the 1970s. It is a reflection of the wider issue in the market, it just makes sense for developers to deliver at a larger scale.”

The picture is hardly better at the next size scale, with only 11 units available in the 20K SF to 50K SF category, according to Savills' latest Dublin industrial and logistics market report. Across the sector Savills states that vacancy rates stood at 1.1%.

Savills predicted that supply constraints across the industrial and logistics sector could contract to see the vacancy rate fall to as low as 0.7% by the end of 2022. 

“Historically, units of this age would struggle to lease, however, we expect them to lease relatively quickly due to the strength of occupational demand and the shortage of alternative options,” Savills' report says.

Supply constraints can often be attributed to a lack of capital for new projects. However, Dublin’s industrial market isn't short of investment; far from it. JLL’s latest industrial market report for Q1 states that investment in the first quarter of 2022 was among the largest in the real estate sector, standing at €139M. 

According to JLL, Ireland, and in particular Dublin’s logistics market, is arguably a microcosm of a global phenomenon.

"Demand for logistics or warehouse space is at record levels across the globe, and investor appetite for logistics assets will remain at heightened levels until supply catches up with demand," a report from the brokerage said.

This supply shortage will have an inflationary impact on rents — at least until new supply comes on board. 

Across the larger sites JLL has identified 4.5M SF of industrial and logistics space which is available for occupiers across all sizes, with rents currently at €10.75 per SF and expected to rise. Rental growth is expected to top 7% this year and hit more than 12% in 2023.

The soaring interest in logistics is reflected in the number of deals concluded in the latest quarter.

Transactional data from CBRE shows that as far as leasing deals are concerned, 2022 started off with a bang. A total of just over 1M SF of transactional activity was recorded in the first three months of the year, with 30 industrial deals completed.

The agency expected secondhand stock to reach €9.75 per SF for prime sites in the coming year. The most recent MSCI Irish Property index found that Ireland achieved a total return of 23% in 2021 on industrial property.

CBRE noted that it has received “significant demand” in the sub-20K SF size bracket, with just under 4 in 10 outstanding requirements for sub-20K SF spaces.

"While most of the transactions we have seen in the Irish market of late have been large and there is particular demand for large facilities from third-party logistics companies, the reality is that there is also strong demand at the other end of the scale for small units, particularly amongst SME businesses,” CBRE Ireland Executive Director, Research and Consultancy Marie Hunt said. 

“Supply at this end of the market is very low, hence the recent entry of new entrants such as Chancerygate, which recently acquired its first site in Dublin and which will focus specifically on this part of the market.”

Chancerygate's first scheme could provide a template for other investors to follow when it comes to solving Dublin's industrial space shortage. Specialist investor Bridges Fund Management and developer Chancerygate acquired the 5-acre site on Swords Road for €4.5M earlier this month. 

The joint venture aims to speculatively develop just over 1 hectare of Grade A logistics and warehouse space divided into 14 units that will vary in size from 3.5K SF to 20K SF.

The site itself is connected via the M50 and M1 around 0.6 miles south of Dublin Airport.

The scheme may be the first of its kind for a number of years. However, if trends continue, the appetite for more space will rise even higher. 

For CRE investors looking for new opportunities in Ireland, watch this space.