Dublin’s office market is in a downswing. However, some cycles are more severe than others, and the prevailing balance of forces suggests that this will not be an extreme cycle.
A palpable anxiety has emerged about Dublin’s office market. This is understandable.
Firstly, it is common knowledge that tech sector activity has slowed and remote working has gained traction. These factors have the potential to dampen business space demand.
Secondly, key market metrics are showing signs of stress – vacancy is rising and the more meaningful measures of office rents are under pressure.
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Thirdly, people remain sensitised to any bad news about commercial property because of its role in the economic crash 15 years ago. And, because aspects of the market are not wholly transparent, this naturally arouses suspicion.
Because office construction takes years, some projects will have passed the point of no return by the time market conditions deteriorate, and these will add to the oversupply
However, my read is that Dublin’s office market is reasonably robust. Office cycles unfailingly follow the same path. Starting in a slow economy, the demand for business space is weak, causing vacancy to rise. This favours tenants in lease negotiations, putting downward pressure on rents. Falling rents negatively impact commercial property values, challenging viability and putting a brake on commencements.
Critically, however, office completions continue to flow strongly for a period after this. Because office construction takes years, some projects will have passed the point of no return by the time market conditions deteriorate, and these will add to the oversupply. The only resolution is to wait for economic growth to absorb this surplus, and this will eventually trigger a new development cycle.
Supply overshoot
It is clear from this that construction lags hardwire a supply overshoot into every office cycle. But this is not only inevitable, it is necessary; rising vacancy and falling rents are the signals for developers, and their funders, to turn off the tap. Nevertheless, every oversupply situation causes pain, and the severity depends on three things;
1. The scale of the vacancy overhang when the market reaches bottom-dead-centre.
2. The rate at which supply slows once peak vacancy has been reached.
3. The pace at which office demand digests vacant space once things begin to recover.
It is clear from this that construction lags hardwire a supply overshoot into every office cycle. But this is not only inevitable, it is necessary; rising vacancy and falling rents are the signals for developers, and their funders, to turn off the tap. Nevertheless, every oversupply situation causes pain. With insufficient leasing to absorb the additional supply of new office blocks nearing completion, I estimate vacancy will top-out at about 15.5 per cent late this year or in the first half of 2024 (depending on on-site progress).
Juxtaposing this against a natural vacancy rate which academics, including myself, have quantified at around 11 per cent suggests an overhang of around 4.5 per cent of stock at the lowest point of this market cycle. This equates to around 200,000 sq m, which is less than half of the 2010 overhang, and quite a manageable quantum of space to digest.
Whatever else happens, this suggests that the current downswing should not be too severe. The determinants of how quickly this overhang will be absorbed also look reasonably benign. On the supply side, 2022 was the strongest year for office development in Dublin since 2008, with around 240,000sq m completed. A similar amount will be delivered this year. However, developers and their funders have heeded the market signals, and speculative commencements dried-up some time ago. Consequently, it is likely that less than half of this quantity will be delivered in both 2024 and 2025.
despite recently pulling back their GDP growth forecasts, both the Central Bank of Ireland and the ESRI are nonetheless predicting robust jobs growth this year and next
Admittedly, there are short-term demand-side challenges. Firstly, Ireland has been the EU’s biggest adopter of remote working since 2019, with 36 per cent of employees now sometimes or usually working from home. This has enabled organisations to rationalise their office accommodation, reducing the average space per employee ratio from 12.6 to 11.7 sq m. All else equal, this would slow the rate at which our peak vacancy overhang gets absorbed. But there are two big caveats.
Clear precedent
Jobs growth has the potential to dominate any negative impact that a reduced occupational density ratio would have on office demand.
We have a clear precedent for this. In the 1990s, a shift from cellular to open-plan offices caused the space-per-employee allocation to fall. Despite this, office demand powered ahead because of the Celtic Tiger jobs machine. Admittedly, the immediate macroeconomic prospects look less favourable than they did back then. However, despite recently pulling back their GDP growth forecasts, both the Central Bank of Ireland and the ESRI are nonetheless predicting robust jobs growth this year and next.
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Also, it should not be overlooked that the very factors that have made Ireland the biggest adopter of remote working should benefit the economy, and business-space demand, in the long-run.
A similar logic applies to the other factor that is currently dragging on office demand. Between 2017 and 2019, tech accounted for 52 per cent of Dublin office take-up, but this share plummeted to 12.6 per cent in the second quarter of 2023. As global tech brands strive to contain costs , office leasing has gone out of fashion. However, one expects this to wash through in due course and, over the long-term, it is hard to view the large-scale presence of technology brands in Dublin as anything other than a positive for the economy and the property market.
John McCartney is Director of Research at BNP Paribas Real Estate Ireland
