Ireland’s commercial property market is on the cusp of monumental collapse

Last Sunday evening, I strolled from Dublin Castle (that’s hosting the brilliant Festival of History) down the Liffey via Ringsend to the 3Arena. The sun was out, it was warm for September, and miraculously dry. Weaving from the heart of the old city around the Castle, Parliament Street and Dame Street down to the river at O’Connell Bridge and on down the quays, allowed me to take in Dublin’s commercial property stock. I could see the three main eras of building – almost walking through time.

Dublin’s office market has three main categories. The first is old Georgian/Victorian Era, around the Castle, in the squares and along the upper quays. The second, that we could term the Crony Era, contains purpose-built offices erected between around 1960 and 2000. The third epoch is the Globalisation Era, built from 2000 to now. Through Dublin’s commercial property, we can see the three great building periods in the development of the city.

The Georgians obviously built much of what we imagine Dublin to be. Together with the Victorians, their buildings constitute the old commercial stock of the city, refurbished gentry houses, now home to mid-sized lawyers, accountants, ad agencies and the like.

The Crony Era offices were built by the first wave of upwardly mobile property developers in the new State, the so-called “Men in the Mohair Suits”. These developments were largely the result of sweetheart deals between politically connected developers and their friends in government. Surprise, surprise, built on the sites of torn-down Georgian gems, these offices were leased to government departments and national banks. Lining the pockets of a crony class of builder-developers who became rich on the back of political favouritism, these are some of the ugliest buildings in the city. Financed by guaranteed income from government departments, constituting zero-risk loans for the banks, the Crony office epoch kept that tight little circle in politics, banks and builder-developers sweet, underwritten by you, the taxpayer.

In today’s Ireland, the rich live in houses that were built for the poor

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The third age of Dublin’s commercial office stock is the Globalisation Era. These buildings, evident along the lower docks and built in the last 20 years, are the steel and glass citadels of the multinational consultancies, tech companies and international banks. A few local bigwig lawyers, perhaps suffering from “atrium envy”, have got in on that act, ensuring parity of esteem at The Ivy.

Once interest rates rise, all bets are off, and the calculations made when interest rates were zero mean nothing

What binds these architectural styles, various epochs and their contributions to the Dublin skyline is that they are all going to crash.

The Irish commercial property market is on the cusp of monumental collapse. The economics of Irish commercial property right now is simple. Prices go up when interest rates are falling, vacancy rates are low, demand is high and there is short supply. All these factors are pointing in the opposite direction.

Interest rates have shot up and payment schedules in all these new buildings will come up for refinancing at rates which are possibly three times higher than the original financing costs. Dublin had huge oversupply, and more is coming on stream. Look at the amount of cranes in the sky! We have among the highest vacancy rates in Europe, which means lower incomes accruing to the landlords, which affects their ability to pay back their borrowings.

[ Commercial real estate investment drops to less than half Irish average ]

If Irish office prices were low, things wouldn’t be so bad – but they are not. Prime rental levels in Dublin are about €700 per sq m – among the highest in the euro zone. The city is flooded with new space. According to commercial real estate services and investment firm CBRE’s 2023 Outlook for the Irish market, “approximately 216,000 sq m (2.32 million sq ft) of under-construction office stock is expected to reach practical completion in 2023 and this will grow the total size of the Dublin office market to over 50 million sq ft”. That’s not what anyone wants to hear!

It’s basic economics: too much building, fuelled by pre-pandemic and pandemic-era interest rates at zero, rendered all finance models nothing more than guesswork. When interest rates are zero, it is mathematically impossible to value any venture, so neither lenders nor borrowers could assess risk in any meaningful way. That world is over. Interest rates were reduced to a 5,000-year low of 0.0 per cent back in March 2016. The ECB eventually increased the rate to 0.5 per cent from July 27th, 2022. The ECB rate then rose to 4.25 per cent on August 2nd, 2023, and was increased to 4.5 per cent on September 20th, 2023. Money has not been this expensive since 2000.

[ The Irish Times view on Dublin’s vacant properties: a picture of civic underachievment ]

Once interest rates rise, all bets are off, and the calculations made when interest rates were zero mean nothing.

Don’t take my word for it, look at what the property insiders are saying. It’s carnage out there. In its latest assessment released on Tuesday, CBRE tells us that investment in Irish commercial real estate declined sharply over the last quarter with a total of only 30 transactions amounting to just €444 million, which is well below the normal quarterly investment average of around €1.1 billion. Investors are running scared. In the past year, total new investment in the entire commercial property market in Ireland was €1.4 billion – about 25 per cent of the typical amount invested in Irish commercial real estate on average over the past decade. The market is grinding to a halt.

The next phase is where prices start to fall and fall quickly, because vacancies are already high. Wait until the new developments come on stream!

According to Savills European Office Outlook, the average European office vacancy rate increased from 7.2 per cent to 8 per cent over the past 12 months. The vacancy figure for Dublin is 14.9 per cent – way above the EU average, and yet our prices per square metre remain – laughably – close to the most expensive. The exposure to tech firms is Dublin’s Achilles heel. Tech companies are cost-cutting and downsizing, desperately trying to sublet space that they signed leases on but now do not want. Savills reports that the amount of tenant space available for sublet in Dublin increased by 200 per cent between Q1 2021 and Q1 2023. And it’s not just Dublin. Another source on vacancy, Geodirectory, maintains that across the country, the national commercial vacancy rate rose to a 10-year high of 14.1 per cent in Q2 2023.

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Expect desperate property owners to be leaning on tenants to demand their employees to scrap working from home. The very last line of defence against a crash will be an all-out effort to force employees back into the daily, grinding commute in order to fill up empty offices. There surely has to be a better way to live than being hostage to property interests once more?

When taken together – changes in lifestyle and increased working from home, an endemic structural oversupply and lack of immediate demand, the whiplash in interest rates requiring heavily leveraged investors to sell, and the impact of much higher refinancing costs – we have the conditions for a perfect storm leading to commercial property meltdown.

Here we go again. Strap in tight.