The commercial property market in Dublin is facing significant challenges, and according to a recent report from BNP Paribas Real Estate (BNPPRE) Ireland, is predicted to hit its bottom in 2024 with a 16 per cent vacancy rate. The report highlights a sharp decline in office space demand in the capital; in the third quarter of 2022, just under 29,000sq m (312,150sq ft) of space was leased, representing a 63 per cent drop from the previous year.
However, Dr John McCartney, director and head of research at BNPPRE, remains calm in the face of media excitement in the wake of the report – perhaps because he has been warning about this coming for quite some time.
He points out that we don’t need to get back to zero: 11 per cent is a “comfortable” vacancy rate, acting as the tipping point between positive and negative rental growth.
“The difference between 16 per cent and 11 per cent, in absolute terms, is about 220,000sq m of excess space. If we compare that to where we were in 2010, for example, when the market got to bottom dead centre during that cycle, there was about 430,000sq m of surplus space.”
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The construction pipeline
Development decisions made pre-pandemic are now coming to fruition, with more than 216,000sq m (2.32 million sq ft) of office space expected to be completed in 2023, further exacerbating the oversupply issue.
“There’s a long lead time on the delivery of space, and the risk for anybody that’s involved in commercial development is that demand can evaporate in an instant,” says McCartney. In recent years he has seen available funding curtailed “except in the circumstances where a pre-let was already in place to de-risk the development at much lower loan to value ratios”.
“But the positive news is supply has never been allowed to run too far ahead of this cycle, and the reason for that is the posture of the banks, post-global financial crisis.”
The remote working effect
Commercial tenants are making use of remote working to reduce the amount of office space they need to lease.
The BNPRE report indicates that the average size of leased office space has more than halved, falling from 1,510sq m (16,274sq ft) to 655sq m (7,046sq ft) and that 12.3 per cent of this year’s office take-up has been accounted for by organisations downsizing.
“Historically, for every net additional service sector job that was created, it would consume about 13sq m of office space,” McCartney notes. “Remote working, with only a percentage of staff attending the office on any given day, is facilitating reduced space per employee ratios.”
In a full employment market, companies competing to attract staff are loathe to mandate a return to office, and so the impact of remote and hybrid work on property demand makes precise forecasting challenging.
Make-up of the market
After the downturn in tech and layoffs in the sector at the start of this year, demand in the commercial real estate market has shifted away from tech firms, with those accounting for only 8.4 per cent of office space leasing between July and September, marking their lowest share on record.
However, the Dublin market benefits from a diverse occupier base, including aviation leasing and local professional services firms, which has mitigated the effects. “Technology companies have been taking all of the prime space over the past five or seven years and professional services occupiers were finding it difficult to compete with them at the rent levels,” says Colin Richardson, director and head of research at CBRE Ireland. Pointing to Citigroup signing a €300 million deal for a new office campus in north docklands last year, he says, “There are big deals happening in those sectors; they still need attractive city centre space in order to attract employees.”
Richardson has been tracking the demand in the market. “We’ve got about 2.4 million sq ft of demand at this moment in time, which is essentially about one year’s worth of take-up activity over the last 10 years.” With the demand lessening, he predicts about 50 per cent of that level of take-up this year.
Grey space, silver lining
One of the most high-profile instances of reduced demand for office space is Meta (formerly known as Facebook). After forking out £149 million (€171 million) to break the lease on its office in central London, Meta has been re-evaluating its real estate portfolio globally and reportedly decided to forego occupying almost 3,250sq m (35,000sq ft) of its new European headquarters on the site of the AIB Bankcentre in Ballsbridge.
The phenomenon of grey space – when a tenant vacates all or part of their office space while still within the lease period – remains elevated since the pandemic, compared with the long-term average, according to McCartney.
This creates a silver lining for start-ups or companies with limited budgets looking for office space; grey space can be cheaper than a new lease, available on more flexible terms, and may also come semi-fitted out too. Although, the original tenants are likely to keep the best space and sublet the less desirable parts.
Flight to core
In the premium end of the market, demand is strong for two reasons – creating offices that are attractive to staff, and futureproofing for sustainability.
The first element of this is because companies are prioritising providing a welcoming, flexible and efficient work environment for employees when they are on-site. This is moving demand away from the suburbs and towards the city centre, where staff can enjoy the amenities and social life that come with the location.
Richardson has observed this all over Europe, from high vacancy rates in La Défense in Paris while the Centre West area holds strong, and Canary Wharf in London emptying into the West End.
“When there’s a softness in the market, you see a flight to core. People gravitate towards the best products, that they know will last the test of time.”
According to Richardson, the rising vacancy rate isn’t impacting that top end of the market. “Where you’re seeing softness in terms of rents and an increase in incentives, such as rent-free periods, is in the secondary market – older buildings in largely non-core locations, whether that’s on the fringe of the city centre or in the suburbs.”
What is to become of all those unloved old office buildings, languishing unused? According to Richardson, repurposing as hotels is the most likely fate for some. He points to two buildings for sale currently – the old Ulster Bank on College Green, and offices at 5-9 South Frederick Street – both likely candidates to become hotels rather than being refurbished as offices.
Green buildings
Demand remains strong for high-quality properties that tick all the green boxes for companies looking to lower their carbon footprint. Prime rental levels in Dublin are among the highest in the euro zone, despite a flood of new office space.
According to BNPRE, 72 per cent of this year’s office take-up has had a BER rating of A, while at CBRE, the definition of prime grade A+ office space is stringent and increasingly defined by sustainability credentials, as well as prime locations. A BER rating of at least A3 is crucial, along with strong sustainability credentials – such as LEED or BREEAM certification.
“We haven’t got an excess amount of that grade A+,” Richardson says. “Global corporate occupiers are starting to align their corporate governance strategies to be in buildings like that by 2030, and in some cases, before that.” The public sector is also demanding sustainability credentials on any new leases it signs.
“In the key office locations of Dublin 1, 2 and 4, we’ve got about 20 per cent stock of grade A+, so that’s not a massive amount of it, and over time, corporate occupiers who aren’t in sustainable buildings will have to migrate into that portion of the market.”