The Central Bank has warned that Dublin office vacancy rates could spike to as much as 26 per cent in the next two years in a severe scenario, as the market continues to be subject to significant uncertainty.
The bank’s central scenario is that vacancies will rise from 17 per cent at the end of last year to 18.5 per cent by 2026, it said in a special report published on Tuesday alongside its latest biannual Financial Stability Report.
A more benign scenario could see the vacancy rate dip to around 15 per cent.
Deputy governor Vasileios Madouros said that the out-turn will depend on how working habits evolve and what companies will do as office leases come to an end.
“The scenarios highlight the prevailing uncertainty in the market,” the report said.
“Certain secondary, non-prime markets are likely to be particularly vulnerable to considerations around energy efficiency.”
The total Irish commercial property market is valued at €144 billion, the Central Bank estimates in the special report.
This follows a 27 per cent slump in property values since 2019, which has been driven by the growth of working from home practices and e-commerce in the wake of the Covid-19 pandemic as well as a surge in interest rates as central bank sought to fight inflation.
Does Dublin have a problem with vacant offices?
Still, the report highlights that the impact of the downturn on Irish banks is limited by the fact that they have much lower exposure to commercial property lending since the financial crisis, and have also eschewed speculative construction since then.
The domestic banks currently have €12 billion of commercial property loans on the books, equating to about 10 per cent of their portfolios.
At the time of the property crash, commercial real estate (CRE) loans made up 30 per cent of the sector’s combined loans.
“By contrast, in 2024, the CRE market relies much more heavily on international sources of finance. This includes financing intermediated by Irish-authorised property funds, which hold close to €30 billion of assets, much of which is financed with debt and equity from abroad,” the report said.
“More broadly, market intelligence and transaction data suggest that a meaningful proportion of CRE assets are likely held by, or funded by, overseas entities on a cross-Border basis. While more international investor participation, which has been a feature of global CRE markets for many years, can increase risk associated with capital inflows and a more amplified asset price cycle, it also mitigates domestic financial stability risks through risk-sharing mechanisms when shocks hit.”
The latest Financial Stability Report said that the ongoing strength of the Irish economy and the gradual easing of inflation continue to support the resilience of households and businesses, but risks remain amid rising geopolitical tensions.
It said that the global economy has been more resilient to higher interest rates than many had expected and that some of the most acute risks have eased somewhat since the previous report last November.
However, rising geopolitical tensions mean further shocks are possible, creating a particular concern for an open, highly-globalised economy like Ireland.
Meanwhile, Central Bank governor Gabriel Makhlouf said he will be writing to Minister for Finance Michael McGrath in the coming weeks to give his views of the upcoming budget.
The Government has faced calls from a number of agencies – including the Irish Fiscal Advisory Council (Ifac) and the Economic and Social Research Institute (ESRI) – to avoid a giveaway budget as it eyes a general election.
However, Minister McGrath has promised a “substantial” income tax package in the upcoming budget.
Mr Makhlouf highlighted that the economy running at full capacity – with the unemployment rate running at a little over 4 per cent – “it’s really important that fiscal policy operates in a way that supports monetary policy in the euro area”.
The European Central Bank (ECB) and other major central banks have used interest rate hikes in recent years to try to take spending capacity out of the economy to fight inflation.
The ECB’s decision last week to cut its main rates by a quarter of a percentage point – with its key deposit rate falling to 3.75 per cent – has been driven by a drop in the euro zone inflation rate from a peak of 10.6 per cent in late 2022 to 2.6 per cent last month.
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