The attraction for most people is often the housing market and the challenges it presents. However, the commercial real estate sector is now also proving interesting, especially in Dublin. The first quarter of this year ended with 787,000 square metres of available modern office space in the city, as per the reports of property firm Lisney. This figure marks an 8.6% rise from the previous quarter which ended with 725,000 square metres of similar space.
This surge has pushed Dublin’s overall vacancy rate to an elevated 17.7% by the end of March, the highest it has reached since the recession ended in 2014. The vacancy rate has seen a significant increase from the meagre 6.9% in early 2020. A key contributor to this development is the empty “grey space” in new buildings built on speculation and surplus unused office spaces which were let but currently unoccupied.
The trend is concerning enough for the Central Bank of Ireland to focus on commercial property as a significant feature in its June 2024 financial stability review. Their estimate of the total value of commercial properties in Ireland is around €144 billion, including offices, retail and industrial sites. Although industrial buildings worth more in total when compared to offices and retail spaces, the office market in Dublin is of particular importance.
The estimated value of office spaces in Dublin is around €25.6 billion. This is more than thrice the value of office spaces elsewhere in Ireland, almost close to one sixth of the value of all commercial properties in the country.
Leasing by tech companies have significantly declined, reducing from 60% in 2019 to a meagre 20% the following year. The pandemic has significantly affected office prices, however, since the rise in global interest rates in 2022, the decline has been more drastic than expected. The Central Bank reveals the latest data, indicating an almost 27% drop since the pre-Covid peak in the third quarter of 2019, with a considerable 13.1% decline last year.
The decline in transaction numbers adds to the uncertainty of market valuation as it hampers price discovery in the globally declining commercial real estate market.
The Irish marketplace is undergoing a distinctive and significant fall due to an interconnected global event, which has had a more severe impact in comparison to many other countries worldwide. One reason for this, as highlighted by the Central Bank, is the crucial role that the office sector plays within the nation’s commercial property market.
During the pandemic and as a result of higher interest rates in 2022, a noticeable contraction of capital values occurred within global and Irish retail markets. Nonetheless, despite the fall in prices in the retail sector, the office sector has experienced a far steeper drop.
There are specific sub-sections within the office and retail markets that have seen substantially larger decreases in rent values, such as major urban shopping areas, rural retail markets and to a lesser degree, offices in Dublin 4.
Rental market prices adapt at a sluggish pace due to existing long-term lease agreements. A fraction of the office supply is renegotiated each year, which combined with employer uncertainty about post-pandemic workspace needs, has led to substantial ambiguity regarding rental price trajectories and their eventual adjustment to the sudden lack of office demand since 2020.
One source of concern is whether office building in Dublin might entirely cease soon?
As vacancy rates increase in aggregate, however, future rent prices will be affected in due course as leases run out. The impact of the weakened rental income and consequent asset value has not fully come into effect and continues to emerge, impacting office investors and their ability to maintain their financial obligations.
A contributing factor to the current circumstances in Dublin is the city’s reliance on global technology firms, which rapidly expanded before and during the pandemic and promptly scaled down afterwards. As a result, the tech companies’ demand for office space has drastically dipped, from approximately 60% of Dublin’s annual total office uptake in 2019 to nearly 20% the following year.
Additionally, the shift towards remote working in Ireland, reportedly more prominent than in other EU nations, according to Eurostat, is another contributing factor.
Further, the surplus supply of offices expected to be available soon is currently influencing the market’s prospects.
Moreover, other impending hurdles include property advisory firm, Savills Ireland, warning that Irish office landlords could risk costs upwards of €7 billion to renovate their properties to comply with upcoming energy efficiency norms.
Savills suggests that the European Green Deal is stimulating the need for commercial buildings to achieve a minimum of a B rating in energy efficiency. This conforms to the Energy Performance of Buildings Directive, which requires certain energy performance standards for commercial buildings, and the energy efficiency directive presenting goals for the public sector, one of the biggest tenants, to set a standard.
However, Savills Ireland raises a warning about the country’s office spaces regarding their energy efficiency. Presently, a mere 2% of office buildings across Ireland have an A rating for energy efficiency, while a shocking 59% is rated D or lower. Orla Coyle, Savills Ireland’s head of ESG, remarks that this not only affects the commercial real estate sector’s ecological footprint but also business operational costs and these spaces’ appeal to potential occupants.
Despite these issues, there is some positive news. Some new office developments will likely be postponed for the future. Moreover, the Central Bank points to continued but slower growth within the local economy and labour market as a potential help.
A survey by the American Chamber of Commerce revealed that 56% of US firms operating in Ireland expect their employee counts to grow in the coming year, supporting this outlook. 35% also project to maintain their present employee numbers.
Considering the problems plaguing the office block sector and the lack of affordable residential properties, it may appear that converting unused offices into flats might be an obvious solution. However, the complexities of the property market indicate that the problem isn’t primarily commercial property but residential property.
Indeed, housing was ranked as the number one obstacle by the members, with 49% stating that it poses the biggest challenge for their company’s growth and investment in Ireland. A staggering 98% found that getting residential accommodations for their staff in Ireland was difficult.
Unfortunately, the process isn’t quite as straightforward as it seems. “While the idea certainly holds merit, acquiring planning permission for such conversions is a challenge. Not to mention, altering open plan offices into residential units is an expensive task,” suggests Enda Moore from Hooke & MacDonald.
In most office complexes, bathrooms are centrally positioned, serving entire levels. Modifying these to connect to one or two bathrooms in each apartment is a complex process. Plus, buildings dating back to the 1970s present their own problems, such as inadequate floor to ceiling heights making it difficult to run services under the floors, Moore explains.
However, this is a concept that necessitates further consideration. There are opportunities, particularly in older buildings, which are essentially redundant and already require high-cost repairs to meet current office regulations anyway. “Every building must be evaluated individually. It may not be feasible for all structures, but it would work for some and undoubtedly needs to be investigated further,” he states.
“It would be promising to witness, especially since numerous office structures are situated in desirable residential areas, equipped with the benefits of city living,” he elaborates.