For the average individual, it’s the residential property market, and the difficulty getting into it, that soaks up our attention. But the commercial property sector is compelling viewing now too, particularly in Dublin.
According to property firm Lisney, at the end of the first quarter of this year there were 787,000sq m of modern, purpose-built office accommodation vacant across the capital, an increase of 8.6 per cent in one quarter alone, from 725,000sq m in December.
It put Dublin’s overall headline vacancy rate at 17.7 per cent at the end of March, its highest level since the end of the recession in 2014.
It’s a rate that has more than doubled since early 2020 when it was just 6.9 per cent, with the majority of the increase coming from speculatively built new buildings and “grey space” – surplus office accommodation that is let but not in use by the tenant.
The situation is worrisome enough for the Central Bank of Ireland to produce a special feature on commercial real estate in June, as part of its financial stability review 2024.
It estimates the total value of Irish commercial properties at about €144 billion, including office, retail and industrial. While the country’s industrial buildings are worth more in aggregate than office and retail, in Dublin the office market is particularly important.
At an estimated value of €25.6 billion, it is more than three times as valuable as the office stock in the rest of the country and valued at close to one sixth of the stock of all Irish commercial property.
Letting activity by tech companies has fallen substantially, from about 60 per cent of total annual Dublin office take-up in 2019 to about 20 per cent last year.
While the pandemic had a seriously dampening impact on office prices, the current decline has been sharper since the increase in global interest rates in 2022.
According to the Central Bank, the latest figures suggest a decline of almost 27 per cent since the pre-Covid peak, in the third quarter of 2019, with a decline of 13.1 per cent last year alone.
As in many commercial real estate markets globally, the fall in transaction volumes limits price discovery in the market, which adds to valuation uncertainty, it points out
. But while the Irish market is being affected by a correlated global shock, it also appears to have experienced a sharper cumulative decline than found in many other countries. This, the Central Bank points out, is part-explained by the outsized importance of offices to the overall commercial real estate market here.
Capital values in many global and Irish retail markets also contracted significantly during the pandemic and in response to higher interest rates from 2022. However, prices have continued to fall significantly in the office sector, while the rate of decline in the retail market has been lower, it adds.
Within the office and retail markets there are particular market segments that have experienced comparatively larger falls in rents, including some of the major city centre shopping districts, provincial retail markets, and to a lesser extent Dublin 4 offices.
Market rents adjust slowly, with long leases meaning new agreements are negotiated gradually.
“With only a portion of the office stock up for renegotiation in a given year, and ongoing uncertainty for many employers about their post-pandemic ‘steady state’ need for office space, there remains considerable uncertainty around the path for rents and their ultimate adjustment to the substantial shock to office demand since 2020,” it says.
Could office construction in Dublin soon come to a full stop?
Rising aggregate vacancy rates will, however, ultimately impact future rents as leases expire. “The combination of weakening rental income and the knock-on implications for asset values, means the full extent of the impact of this shock on office investors and their capacity to service financing is still unfolding,” it adds.
One factor driving the situation in Dublin is its reliance on international technology companies, many of which grew rapidly before and during the pandemic and then “right sized” sharply afterwards.
Letting activity by tech companies has fallen substantially, from about 60 per cent of total annual Dublin office take-up in 2019 to about 20 per cent last year.
Another factor is Ireland’s shift towards working from home which, according to Eurostat, is more pronounced than in other EU countries.
A significant office supply pipeline destined to come on the market is also weighing on the outlook.
There are other challenges. Property adviser, Savills Ireland, has cautioned that Irish office landlords could face costs of at least €7 billion to upgrade their properties to meet impending energy efficiency standards.
According to Savills, the European Green Deal is driving a demand for commercial properties to achieve at least a B energy rating.
The Energy Performance of Buildings Directive mandates minimum energy performance standards for commercial properties. The energy efficiency directive sets targets for the public sector, one of the largest tenants, to lead by example.
But the current state of Ireland’s office stock in terms of energy efficiency is a significant concern, it warns. As of now only 2 per cent of office buildings across the country hold an A rating for energy efficiency, while 59 per cent of the office stock is rated D or lower.
According to Orla Coyle, head of ESG at Savills Ireland, this situation not only impacts the environmental footprint of the commercial real estate sector but also affects the operational costs for businesses and the attractiveness of these spaces for potential occupants.
It’s not all bad news for the sector. For a start, at least some of the new block delivery will simply be pushed out into the future.
The Central Bank is also forecasting continued, if moderating, growth within the domestic economy and labour market, which will help.
The fact that more than half (56 per cent) of US companies with a presence here surveyed by the American Chamber of Commerce indicated they expect employee numbers in their Irish operations to rise in the year ahead, backs this up, with 35 per cent expecting to maintain current numbers.
Given the difficulties facing the office block sector, and the ongoing lack of affordable residential property, the obvious solution from the outside would be to convert vacant offices into apartments.
However, in an indication of just how interrelated all strands of the property market are, it isn’t commercial property that was flagged up by respondents as being an issue, so much as residential property.
In fact housing was rated the top challenge faced by its members, with 49 per cent saying it is the most important challenge for Ireland to overcome for their company to invest and expand in Ireland. No less than 98 per cent said the availability of residential accommodation is challenging for their staff in Ireland.
Given the difficulties facing the office block sector, and the ongoing lack of affordable residential property, the obvious solution from the outside would be to convert vacant offices into apartments.
Alas, it’s not so simple. “It makes a lot of sense but what limits it is getting planning permission for the conversion plus the fact that it is a costly exercise to convert open plan offices to residential units,” adds Enda Moore of Hooke & MacDonald.
Offices typically have bathrooms at their core servicing entire floor plates. Rejigging these to allow for them to connect to one or two bathrooms for each of a number of apartments is trickier than it sounds. For older, 1970s office blocks there are issues with floor to ceiling heights too, with many insufficiently high to run services under floors, he explains.
It is, however, something that needs to be revisited. “There is an opportunity there,” says Moore, particularly for older buildings that are effectively obsolete and in need of expensive remedial works to bring them up to modern office standards anyway.
“You’d have to assess each building on a case-by-case basis and it may not work for every building but it would work for some and definitely needs to be explored,” he says.
“It would be good to see, particularly as so many of these office buildings are in places that would be very sought after locations to live, with all the amenities of the city.”
You can find more on Top 1000 here. For the full list of Ireland’s Top 1000 companies, sign up to the ePaper today. The full supplement is also available in Thursday’s (12/09/2024) print edition
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