With an increasing number of employers mandating a full-time return to the office for employees, are we likely to see an upturn in the office property market in 2025?
As we approach the end of 2024, there is no one-size-fits-all approach to how employers are managing a return to the office, says David Martin, capital and debt advisory partner at EY Ireland: “Each company, its workforce and objectives will differ. At EY Ireland, we operate a hybrid working model where our people divide their time between working on a client site, working in an EY office and working from home.
“This model has been in place for some time and is designed to be flexible in response to the variety of working arrangements which exist across our diverse business. It is a model that continues to work well for our people, our clients and our business.”
One of the interesting dynamics in the office property market in Ireland is the capital structuring that occurred in the past five-to-10 years, says Martin.
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“While previous periods would have seen many office transactions being highly leveraged, recently a more nuanced capital structure has emerged where equity is sharing a much larger load,” he says.
“This meant that when the pandemic hit and remote and hybrid working became the new normal, and subsequently a rapid increase in inflation led to an interest rate adjustment negatively impacting valuations, it didn’t lead to a wave of insolvencies.”
This was because the capital structure led to equity cushions absorbing these shocks in most instances, rather than the debt being heavily impacted, Martin says.
“This is at odds with other jurisdictions, like the US, where office valuations when hit led to more insolvencies based on their more debt-laden structures,” he adds.
In Ireland’s experience, the shift towards hybrid working accelerated by the pandemic has led to a fundamental recalibration of space requirements for organisations, says Martin.
“Many organisations are focused on accommodating modern workforce dynamics, including new ways of working that enhance collaboration, while also delivering on an organisation’s ESG and energy goals,” he adds.
EY’s recent Real Estate Borrowers Outlook explored several key themes in the Irish real estate market, including how industry leaders view the office market in the years ahead, Martin explains.
“Respondents noted tightening credit standards which have resulted in more of an emphasis on a diverse and well-thought out capital structure to allow for future shocks and changes, both domestically and internationally. It is going to be interesting in 2025 as more of the new supply that will come to market, particularly in Dublin, will be taken up, which should lead to a future tightening of supply,” he says. “This in turn may lead to new developments commencing again for new pre-let or pre-sold Grade A buildings.”
Furthermore, in 2025 the increasingly two-track nature of the office market will be further underlined, as we are likely to see more capital being spent on the retrofitting of older office buildings to meet industry and client-required environmental specifications.
“In markets where there is a significant amount of high-quality, energy-efficient space coming on stream, those real estate owners who are not in a position to upgrade their existing buildings may experience more challenges in securing lettings,” says Martin.
A new normal in the office sector is beginning to emerge as valuations have come down and interest rates have reduced. “Most analysts believe this positive trajectory on the interest rate side is likely to continue into 2025,” says Martin. “The anticipated sales of 2 Dublin Landings and the Infinity Building are expected to create a valuation benchmark at which future transactions can take place.
“This in turn should attract more long-term capital focused on ESG-compliant buildings and we expect this to be the catalyst which will generate more transactional activity as the buy-sell spread contracts.”
Foreign direct investment continues to be a key driver in the office market so inbound investment from the US and elsewhere will be an important bellwether for the Irish office market.