Rarely has a real-estate sector been under the microscope as much as the office sector is right now. Uncertainties abound, from the impacts of higher interest rates and slower global economic growth on occupier demand and asset values to the longer-term questions posed by hybrid working in the wake of the Covid-19 pandemic. It’s no surprise that the office market has struggled in response, with MSCI reporting double-digit capital value declines in Ireland over the past year.
However, while seasoned advisers, investors and occupiers may have seen enough economic cycles over the years to at least guesstimate the cyclical impacts on the market, the structural effects of hybrid working on the office market still very much fall into the category of “known unknowns” that former US secretary of defence Donald Rumsfeld famously coined.
In our upcoming report, Offices, Obsolescence and Opportunities, we have analysed a number of important factors that are likely to shape the longer-term outlook for Irish offices post Covid. Overall we find that hybrid working is likely to have both “stock” and “growth” implications for Irish office markets.
A widespread transition towards full remote working to our mind represents the biggest risk for our office stock in Ireland
In our view the Irish economy will still represent a positive tailwind for office demand over the next decade. Even beyond the positive cyclical horizon, Irish productivity per capita and strong population projections should support continued longer-term demand growth albeit perhaps at more modest rates compared with the past 10 years.
Regarding the stock implications, a widespread transition towards full remote working to our mind represents the biggest risk for our office stock in Ireland. But US data currently indicates that only 12 per cent of businesses operate in this way and thus far we have seen no evidence of Irish occupiers looking to transition to this working arrangement. Consequently, in our view the office is likely to remain a central hub for business life over the next decade. That said, if we assume workers will spend only three days a week in the office in future, this clearly has ramifications for the amount of office space that will be needed.
Cushman & Wakefield’s global research on this topic indicates that up to 20 per cent of existing office stock may be surplus to requirements over the next decade as a result of increased hybrid working. However, what this directly translates into for Irish locations is difficult to quantify at this point, involving as it does the complex interplay of a cocktail of factors such as economic performance, office location, commuting times, employee mix, the nature of occupiers’ business lines and employer return-to-office mandates. In terms of the overall impact on Ireland’s office markets, we are optimistic that our strong economic outlook and broad industry spread of occupier demand bodes well at least in a relative sense.
If some Irish office stock will indeed be surplus to requirements over the next decade it raises the question: can its repurposing solve our living crisis? We find that it could certainly help alleviate the crisis but is unlikely to be a “silver bullet”. As a hypothetical example we identified about 500,000sq m (5,381,955sq ft) of space in Dublin’s office market that could be in theory be at risk of obsolescence in the next number of years – that is, it met criteria of being over 750sq m (8,073sq ft), more than 30 years old and having a BER rating of sub-C. While the amount of potential space is sizeable, this represents only 6,000-7,000 units based on an average unit size of 70-80sq m (753-861sq ft) or just over 1 per cent of Dublin’s housing stock in 2022. In addition, viability and architectural considerations are central to how much obsolete office stock can feasibly be repurposed over the next decade, and in our view government incentives may be critical in ensuring widespread repurposing becomes a reality.
Our analysis on the potential for widespread repurposing also highlights the obsolescence risks faced by Ireland’s offices. Excluding Georgian stock and smaller buildings, we find that up to 40 per cent of our larger, more modern office buildings are more than 30 years old and so face potential obsolescence risk over the next decade. About 32 per cent of Dublin’s office stock is older than 30 years, although, compared with other mature European office locations, Dublin still appears at least relatively “young”. While this provides some solace, in our view there is little room for complacency and the data highlights the need for asset owners to devise a strategy around how these assets will live their best lives in the future.
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For most office buildings we believe they will remain offices. But the growth in importance of sustainability for occupiers, investors and lenders in recent years means that in all likelihood some upgrading will be required if offices are to meet modern occupier demands and avoid negative repercussions from obsolescence including higher vacancy and lower rents and capital values. To underline this need for upgrading, we found that in cases of Dublin office take-up of more than 30,000sq ft since 2021, more than 90 per cent of this space was A rated from a BER perspective.
On the whole it is clear that the Irish office market is undergoing a fundamental adjustment. However, in our view reports of the death of the Irish office market are exaggerated as factors such as the need for collaboration, socialisation, brand identity and training/upskilling will underpin its continued raison d’être.
Historically we have seen even recent Irish examples where sectors of the commercial real-estate market have shown remarkable agility, emerging through what many saw as existential crises only to flourish again. The hotel and high-street retail sectors are examples of this. From an office-market perspective, the medium-term challenges are profound but we remain confident the sector can similarly exhibit such resilience and gradually find an equilibrium of its own.
Tom McCabe is head of research and insights at Cushman & Wakefield Ireland
