The office market has hit rock bottom, but real recovery may not occur until 2026

The worst may be behind Dublin’s depressed office sector, but the market’s return to full recovery is likely to be slow.

This was the panelists’ view on Bisnow Ireland Office Summit: Bringing the Workforce event to The Eight on Wednesday.

“We are near the bottom of the market, but there are some headwinds ahead. There is always a lag of 12 to 18 months for increased activity during an economic recovery,” said Fiona Lyons, Mapletree’s chief investment officer and head of commercial asset management in Europe.

She and the panel warned that the commercial real estate sector will only be able to expand once new supply is reduced, even though demand from tenants looks more robust.

“It looks like the remainder of 2024 and 2025 will not see much change, so in terms of economic recovery, we are looking at 2026, where sustainability will also be a major driver of new spatial requirements,” she said.

Bisnow/Mark Faithfull

Darragh Lennon of Fine Grain, Natalie Brennan of Aviva, Fiona Lyons of Mapletree, Stefan Foster of Kennedy Wilson and Barrett Chapman of McCann FitzGerald.

But Lyons also warned large corporations that they shouldn’t wait too long to decide their next moves. The upcoming slowdown in the investment schedule will impact accessibility sooner than many realize – especially if it is assumed that renovated older properties will still mean a wide range of possible locations, she added.

“Repositioning will be fundamental, but there is no such thing as a quick fix,” Lyons said. “Developers will need to start now to prepare supplies in case the new development pipeline is halted. So we need to think about these renovations now, especially given that we don’t think there will be much of a difference in rents or demand between newly built properties and those renovated to a high standard.”

Kennedy Wilson Ireland director of acquisitions and commercial Stefan Foster said that while “hybrid working is here to stay”, the number of people returning to work was improving. He said that while office agents were “probably depressed” after the first quarter, there is now more activity.

“Uncertainty has held the market back,” Foster said. “And this time there was no NAMA or 90% loan value loans among developers.”

Tenants are concerned not so much about the level of rents but about investment expenses, he said. Tenants are still determining their space requirements and are cautious about finishing costs.

“Space selection has become much more employee-centric, which means location and amenities. “We go back to location, location, location,” he said. “One street can have an impact, especially in Dublin, which lacks the micro-hubs of many larger cities.”

With not much new space on the market after 2026, Foster said he believes office vacancy rates are now at an all-time high, which will also result in a focus on renovation opportunities.

“Some sites will work, some won’t. Some will no longer be offices. However, supply and demand will change, helping the retrofit market,” he said. “The worst is already behind us. This is a good time to look for space as a tenant.”

Aviva Life & Pensions Ireland DAC Director of Real Estate Transactions Natalie Brennan said Dublin was not alone in facing the challenges facing the commercial property market.

“Let’s not forget that this is a pan-European phenomenon, but offices still represent around 20% of total assets,” Brennan said. “We have seen that sellers are cautious about bringing properties to market because they want to create competitive tension among buyers to get the best value. Many of the transactions being finalized may have started 12 months ago, so tenants are slow to make decisions.”

Brennan said technology activity, which previously accounted for much of the city’s space use, remains at about 10% of transactions this year. However, financial services, public sector and other tenants such as Citi, EY and BNY Mellon contributed to the acquisition of new locations.

“Tenants have best-in-class demands, which is why city center rents of €62.50 per unit remain stable,” she said, especially given the emphasis on high-quality buildings and locations. “The profitability of renovation often depends on the building and location. The cost-benefit equation is much less clear for out-of-town offices and will not work for every location. There will inevitably be a flight to quality in the city center.”

One company that has buildings on both campus and city center is Fine Grain Property, and chief operating officer Darragh Lennon said renovation options are limited by the difference between seller and buyer expectations.

“For properties with high capital requirements, a gap persists between buyers and sellers,” he said. “The simple fact is that banks are still lending, but on different terms, and unless they are lending at such large amounts and at higher interest rates, buyers do not have as much capital to devote to acquisitions.

“Furthermore, yields have not increased as interest rates have risen, meaning real estate is competing with other investment vehicles.”

Fine Grain’s tenants often prefer to stay where they are, he said, so the company is working with them to raise standards, particularly in meeting environmental, social and governance requirements.

“It also avoids a lot of greenhouse gas emissions. We need to find more ways to reallocate assets with tenants and ESG in mind,” he said. “The market wants all the recent uncertainties to subside, and if that happens, there is a good path to economic recovery.”

BisnowThe next event in Dublin will be the Irish conference on investment and development of residential real estate, which will be held on November 21 at the Aviva Stadium.