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Commercial property market faces into winter, but will it be a big freeze?

The sector is dealing with a double whammy of an economic downturn and changes in working patterns

It’s winter time in the Dublin office market, says John McCartney, director and head of research with BNP Paribas Real Estate, “but this is just economics doing its thing. You need winter so things can regenerate.”

Tech companies are letting staff go and reassessing their office requirements, the pandemic has resulted in a surge in people working from home and interest rates are moving higher. Meanwhile, big office projects that started four or five years ago are coming to completion in a market that is already oversubscribed. Rents are softening and valuations are under pressure.

The vendors of an office block on Harcourt Street, Dublin 2, have slashed their asking price to €37 million from the guide price of €52 million they put on the building when it went on the market in April 2022. The building is fully leased to law firm Byrne Wallace.

At the moment we are looking at a degree of mild oversupply and what is going to happen over the remainder of this year is that oversupply is going to increase

—  John McCartney of BNP Paribas Real Estate

Over on the East Wall Road, on the northside of Dublin’s docklands, an office block occupied by Facebook parent Meta is reportedly being prepared for sale at a guide price of €80 million, below the €101 million that the owners, Kookmin Bank, of South Korea, spent on it in 2018. (In the meantime, the bank had the benefit of five years’ rent, a reported €22.5 million). Meta, which also counts the likes of Instagram and WhatsApp among its businesses, is in the process of moving its European headquarters from Grand Canal Square, Dublin 2, to a new campus in Ballsbridge on Dublin’s southside that includes the former AIB headquarters and new buildings developed by Irish property developer Johnny Ronan. However, in December Meta decided if didn’t require the four new blocks on the site developed by Ronan. Instead, it plans to sublet them to a new occupier or occupiers.


The expectation is that an already oversupplied office market is going to have even more excess capacity by the end of this year. We shouldn’t overreact though, says McCartney. Like the seasons, the commercial property market has its cycle. “With commercial property projects, the tendency is for surges of new supply to come on stream at the same time,” he says.

Developers pull the trigger on new projects when market expectations are such that they decide that “now is the time to go”. The people making the decisions tend to be aligned in their view, “so they all begin to develop at approximately the same time”. Those whose projects arrive early to the market a few years later are usually the ones who get the best returns.

McCartney is very much a numbers man. About 230,000sq m (2.48 million square feet) of office space came on to the market last year. That was the most since 2008, and this year is expected to produce something similar.

“We are now at the peak of this development cycle so those decisions that were taken four or five years ago [to begin projects] are now coming to completed buildings. It is all happening in a glut, as it always does,” he says.

As a result, the vacancy rate has gone from about 10 per cent to 12.4 per cent, and may peak at 15 per cent by the end of this year.

The “balancing point” for Dublin is a vacancy rate of 11 per cent, says McCartney. At 11 per cent, rents tend to be steady. Above that level, they come under pressure. “So at the moment we are looking at a degree of mild oversupply and what is going to happen over the remainder of this year is that oversupply is going to increase.” The market is not going to be able to consume the new office space that is due to come on stream, and the end result will be rents coming under pressure.

On the other hand, the State continues to have one of the best-performing economies in the European Union, with a huge number of very successful multinational companies basing their European headquarters here. This, changing EU law on environmental rules for buildings and the internal policies of the multinationals on energy efficiency are all driving a desire for new, high-quality, energy-efficient offices in attractive locations – especially Dublin and Cork. The new office buildings now coming on stream will eventually be “digested” by the market as employment numbers grow, says McCartney. Much of the older stock will be renovated so it meets the type of energy efficiency standards that top employers will require. And some, perhaps, will be repurposed into residential accommodation.

Only about 10 per cent of office space in Dublin is occupied on a Monday or Friday. Even on Wednesday, the busiest day of the week, offices are barely two-thirds occupied

While the up-down cycle of commercial property development is par for the course, a new element this time round is the aftermath of the Covid pandemic and its effect on work patterns. Data from Savills shows only about 10 per cent of office space in Dublin is occupied on a Monday or Friday. Even on Wednesday, the busiest day of the week, offices are barely two-thirds occupied.

McCartney, again, has a number. This time it’s 10 – the rule-of-thumb number of square metres of office space that is needed for each new job in the services sector. The number is based on the classic open-plan office where each employee has his or her own desk. Now, with hybrid working, that number is going to change. Most likely it is going to go downwards, but it is too early to say with certainty by how much “The practical effect of that will be that your [excess space] will take a bit longer to digest. But it will still get digested. The jobs growth always digests it.”

Some organisations are a little bit afraid that if they push people too much to come into the office, they will join somebody else that is not making them do that. So there is a huge range of profiles

—  Conor MacCabe of architects Henry J Lyons

Conor MacCabe is managing director of Henry J Lyons, an architectural firm with offices on Pearse Street in Dublin and Albert Quay in Cork. The firm has worked on numerous high-profile projects, including the 6,500sq m Novartis Global Service Centre in the Elm Park business park in south Dublin, the Susquehanna trading group’s 11,150sq m offices in the IFSC, and the repurposing of a 5,000sq m three-storey building in Galway city for US insurance group MetLife. MacCabe works directly with clients who are considering taking out leases on office buildings or causing them to be built. It is part of his job to know what the clients want from their buildings. One of the big issues for many companies is how they should respond to hybrid working.

“What is really interesting is the extent to which these organisations want their staff to come in, or don’t. Some of them are [telling staff] it is essential that we have a strong presence in the office, and some of them are actually quite agnostic, and a little bit afraid that if they push people too much to come into the office, they will join somebody else that is not making them do that. So there is a huge range of profiles.”

Another issue is why people are coming into their office, and the consequences of this on the amount of space required. “Quite often people take the view that if you are only in half of the time, then the time you are in is about meeting people. It is about socialising and learning together and so on and so forth, so you need [spaces that accommodate that] and these spaces sometimes take more than a desk.”

Working from home means people have become used to the privacy they have when, for instance, taking part in a video conference from their kitchen. They may find taking part in an online meeting when at a desk in an open-plan office unsatisfactory, so an office might need more space set aside for meetings and privacy. That in turn pushes up the number of square metres required per employee. “If half the people are in on any given day, that does not mean we need half the space. It is probably a bit more than that ... So the net effect is that the number may not be 10 any more – it is less than that, but it is not half of 10.”

MacCabe believes there is a difference between how hybrid working is affecting offices in the city centre and ones based in the suburbs. “Office building values are coming down, certainly in the locations where people are not coming into their offices much, and we would see that people are not coming into the suburban offices in anything like the quantities they were before.”

Employees of businesses with suburban offices are more likely to live in houses with gardens and may as a result be more taken to the idea of working from home. Workers in city centre offices may have a different focus. “The tech companies that drive the city economy, often [their employees] are young, foreign, they don’t live in the suburbs ... They might have a gym and free food in the office. Their life is in the office.” In essence, they don’t want to stay at home in their city centre apartments and work remotely.

Another issue, says MacCabe, is the vibrancy or otherwise of the district in which an office is based. Offices have come to dominate some areas of the city, giving them an empty feel, especially after hours. People are more likely to come to the office to work if the office is based in a vibrant district. There may be a need to change the mix of use of buildings in some districts, he believes, so there is more residential and other types of property that bring life to an area and make it attractive.

The requirement for highly energy-efficient buildings is driving occupancy of modern office blocks in attractive districts, which in turn is taking tenants from older stock. The pause in demand from the tech companies is giving an opportunity to legal and financial businesses to lease high-end buildings that they would previously have been outbid for by the cash-rich tech firms. The housing crisis, MacCabe believes, will be an important factor in deciding whether the tech companies will resume their consumption of Irish office space when they start employing again. “The big question is [whether] things like housing would stop them resuming their growth here and would cause them to resume their growth somewhere else. So, it is really important that we fix the housing issue.”

Both McCartney and MacCabe believe that the dynamics of the market – the squeeze on rents and values in the commercial property sector and the dire residential accommodation situation – may prompt the repurposing of some office buildings as residential accommodation. Last year the approved housing body Tuath, working with Harcourts Developments, Dublin City Council, and the Department of Housing, repurposed two unoccupied office blocks in the Park West business park, in Cherry Orchard, Dublin 12, into 86 apartments. “We also added a floor to the top. The development is fully occupied and the tenants are happy,” says a Tuath spokesperson. “There are more than 200 people living there ... There is lots of natural light. Some of the spaces are slightly different, with slightly higher ceilings, but most feel exactly like a normal apartment.”

A second repurposing development, at Springville House, Cork, where an old commercial building is being turned into 31 apartments, is due to be completed in the coming weeks. “We would be delighted to do more like that,” the spokesperson said. “If there is an oversupply [of office buildings], then maybe that will drive it.”

If we end up with a 15 per cent vacancy rate by the end of this year, it won’t take a huge amount of time for that to become digested if there is a pick-up in the global economy in 2024 and 2025

—  Conor MacCabe of architects Henry J Lyons

Turning office buildings into residential accommodation is not always easy, says MacCabe, not least because office buildings are often built around a core lift shaft with each story having a large floor plate. The distance from the edge of the building to the core can make it difficult to build apartments where every room has natural light. “Fire codes are different, apartment buildings need more staircases, more public open spaces, more services. But there will be more opportunities because the numbers are making more sense. Demand is pushing in that direction.”

Older stock, and stock in the suburbs, may be more suitable for repurposing that stock in the city centre, though the requirement to create a more lively atmosphere in some districts may also drive repurposing in such areas, he believes. McCartney, too, can see how the dynamics of the market and the acute housing shortage could prompt the repurposing of office stock into residential accommodation. With some buildings it may be more cost effective to repurpose them as residential, and so this may well happen.

“But if we end up with a 15 per cent vacancy rate by the end of this year, it won’t take a huge amount of time for that to become digested if there is a pick-up in the global economy in 2024 and 2025 ... We will run into a situation where the office market isn’t really oversupplied any more, notwithstanding that the space per employee may come down.”

There will, McCartney believes, only be a short window of time before it makes more commercial sense to refit old office buildings and feed the demand for modern, energy-efficient office space.