Commercial property holds its own despite challenges

The commercial property market has seen a year of mixed fortunes, with a small number of major deals serving to somewhat mask the reality of growing investor hesitancy as we head into 2023.

John Moran, head of investment and chief executive of JLL Ireland, notes that this time last year the market was in a very different position.

“Interest rates were at historic lows, facilitating cheap borrowing, and government bond yields hovered over the zero per cent mark. Fast forward to December 2022, and while interest rates are not historically high, the successive increases from July by the ECB has led to many non-cash buyers hitting the pause button on acquisitions.”

The atmosphere was one of “cautious optimism” as the year began, Moran says. “We felt that 2022 would be the year Covid would be a thing of the past, and Ireland was in a tremendous economic position – these two elements meant we were preparing for an active year.”

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And despite the obstacles that impacted decision-making in the second half of 2022, the markets recorded substantial investment volumes, with some notable deals completed, Moran says.

“It is anticipated that the year will finish between €5.2 and €5.8 billion, which places it at one of the most significant years for investment volumes.”

One notable prediction for 2022 was that this would be the year when emerging sectors, or alternatives, would significantly impact the market in areas such as hotels, healthcare, senior living and student accommodation. “This came to pass – within the first nine months of 2022, these alternatives did shape the market, and combined the sectors accounted for over 22 per cent of investment volumes.”

Moran also notes that an expectation for 2022 was that the Dublin office occupier market would begin rebuilding after two challenging years under pandemic restrictions. “In January 2022, we forecasted that the leasing activity for Dublin would be circa 2.2 million square feet. We still stand by this forecast with around 1.7 million square feet of space leased by the end of Q3 2022 and several smaller deals expected to sign throughout Q4 2022 to get the market to this target. This is an increase of 37 per cent on the volumes leased in 2020 and 2021.”

During 2022, JLL advised on four of the top six commercial property investments, including what Moran says were the two largest single-asset office deals, the biggest logistics investment and the largest healthcare transactions. These included advising Blackstone on the acquisition of Salesforce’s new European headquarters at Spencer Place in Dublin’s north docklands for €500 million and again acting as adviser to Blackstone for the acquisition of more than 339,000sq ft of office space across four existing blocks occupied by Meta to the rear of its new Ballsbridge campus. JLL also advised Aedifica on a healthcare portfolio of more than 600 nursing home beds across four sites in the Dublin area and advised the vendor for a €128 million forward fund deal of 595,000sq ft for the new Primark/Penneys distribution centre in Co Kildare.

Yet Moran admits that as 2023 begins there will be investor hesitancy due to the rise in negative sentiment, inflationary pressures and monetary tightening across the board. This will be especially felt in the first half of the year, he says.

“The increasing cost of debt and lack of availability will impact underwriting, yields and returns. We expect that yields will soften by 25bps across the board, but this is relatively minor compared to some of the larger markets in mainland Europe.”

Moran also believes that a continuing “price discovery phase” will moderate bidding. “However, we stress that throughout this discovery period, accurately priced offerings will continue to sell,” he adds. “The markets will continue to operate with healthy investment volumes, albeit at slightly lower levels than were recorded in 2021 and 2022.”

JLL is anticipating between €3 billion to €4.5 billion worth of investment volumes in 2023 and Moran believes the year ahead will be a significant “reset” period within the industry, adding that across all sectors, sustainability is leading the conversation and decision-making. “The outlook for the next 12 months continues to be conservative as sentiment can change quickly, and macro-trends usually take a few quarters to trickle through to investment activity. A push toward refurbishments and retrofitting is required across most markets throughout Ireland.”

Savills Ireland managing director Mark Reynolds points out that predictions for the market in 2022 were formed before the Russian invasion of Ukraine, and prior to rising interest rates and inflation really taking off. “However, despite all that, most sectors in Irish commercial property remained resilient and either met or exceeded expectations set at the start of the year.”

Reynolds notes that despite most office-based businesses now offering the option for employees to work from home at least some of the time, the office leasing market performed exceptionally well in 2022, with a number of significant deals, such as TikTok agreeing to take 85,000sq ft of space at the newly developed Tropical Fruit Warehouse in Dublin’s south docklands, and An Post leasing 77,300sq ft across five floors at the EXO – Dublin’s tallest office building – in the north docklands.

“The retail sector has endured a tough few years, but our view was that with the easing of Covid-19 restrictions at the beginning of the year, there would likely be a strong bounceback – and there was,” he says. At the start of the year, there were 17 vacant retail units on Grafton Street – today there are just six small units available for lease, with an expectation of occupancy on the street reaching 100 per cent in 2023.”

Yet Reynolds also points out that 2022 was the year when the impact of Brexit really began to be felt across the board. “I think it is hard for anyone to deny that Brexit has been a complete disaster,” he says, noting that the UK economy has shrunk by 20 per cent. “As one of our largest trading partners, a weakened UK economy does not help Ireland Inc or our wider real-estate markets, either side of the Border.”

He maintains that while the outlook for 2023 is very uncertain, it is “probably more positive now” than it was at the end of the summer period. “For commercial property investment, the difference now, compared to the global financial crisis, is that while investors are still concerned about pricing transparency, there is still equity capital active in the market seeking to be deployed into property assets,” he says. “Furthermore, debt is still also available, albeit at more expensive and difficult to access. This means that pricing is the only inhibitor to transactions, as opposed to a lack of investor demand.”

A challenging environment for retail notwithstanding, with less supply available, Savills expects to see reduced leasing activity in the sector compared with 2022, with marginal rent growth. “But after the stellar post-Covid performance on Grafton Street, we see 2023 as being Dublin 1′s turn to grab the headlines,” Reynolds says. They also expect to see a continued investment focus on ESG (environmental, social, and corporate governance) across all asset classes as real-estate owners and occupiers tackle what the implications are for their businesses.

“Overall, we remain optimistic for the market for 2023 and believe it is well placed to manage the various economic headwinds. Already, there are signs of a badly needed cooling in inflation, and our exchequer returns continue to outperform other advanced economies.”

Colin Richardson, director and head of research at CBRE Ireland, says that from a transactional perspective the Irish investment market showed “remarkable resilience” during the year. “While pricing and deal flow has been impacted to an extent, investment volumes for the full year 2022 will turn out to be very strong.”

Yet he points out that a handful of big deals have slightly skewed the 2022 picture – for example, the completion of the sale of the last listed Irish commercial reit, when Hibernia Reit plc sold to Brookfield Asset Management. “This was undoubtedly the most notable trade of the year at €1.1 billion.” He adds that CBRE Ireland advised on a number of high-profile office investment sales during the year, including the sale of the Watermarque Building in Dublin 4 and the sale of the Eight Building in Dublin 8.

“A number of deals are still closing as we finish the year,” Richardson says. “But it is fair to say that things have slowed and investors are holding back as they wait to see where pricing settles.”

He believes that the first two quarters of the new year will be “reasonably quiet”, but as we enter Q3 2023, there will be “more visibility and stability on interest rates”, while pricing will also have settled. “There will be a more bullish approach by the middle of the year. When pricing settles, we will see trades and transactions take off again.”