A RADICAL drop in office construction in Dublin in the next two years will lead to the loss of some 7,500 construction jobs and cut as much as 0.6 per cent from gross national product (GNP), according to a new forecast.

In a study published by the Economic and Social Research Institute (ESRI) alongside its latest quarterly commentary, economist John McCartney says excessive development has left Dublin oversupplied with office space.

From an analysis of 32 years of annual data, he concludes that the sector is entering the "bust" phase of a boom-bust cycle.

"As we have witnessed in America during the 1980s, and as we are beginning to see in Ireland, overdevelopment can have a strongly adverse impact on the finances of developers, investors and lenders - not to mention national economies."

Office starts in Dublin follow the lead of rental growth and lettings activity as developers pursue opportunities in the market and the completion of office building follows after an 18-month time lag.

"Office completions remained strong in 2008 but the Dublin market is now overbuilt. Our model predicts that output will fall by 48 per cent next year and by a further 14 per cent in 2010," writes Dr McCartney, who submitted the study to the ESRI in his former capacity as head of research with auctioneers Lisney.

"All else equal, this will deduct 0.5 to 0.6 per cent directly from GNP and will lead to the loss of approximately 7,500 jobs."

While acknowledging his estimates are severe, he says it should be noted they are consistent with the scale of retrenchment seen in the wake of previous peaks.

He says office market cycles can be characterised in four stages: recovery; expansion; hypersupply; and recession. In a recession, he writes, buildings started during the hypersupply phase come on the market, compounding oversupply that emerges towards the end of the hypersupply phase.