‘Subdued’ sums up the 2023 commercial property market as weak global sentiment hits investment

Certain events are often tied to a particular word or term. We had two-plus years of “unprecedented” throughout the Covid-19 pandemic, the term “Gubu” will transport those of a particular vintage to another decade, and for 2023, activity within the market will be remembered when the word “subdued” is uttered.

As 2022 came to a close, expectations for 2023 were marked by a sense of caution and observation. This was due to the rapid increase in interest rates, inflation, and the changing dynamics of certain asset classes. Many were eager to see how the office market would evolve in the absence of pandemic restrictions. As predicted, the year began with a “wait-and-see” approach, resulting in lower-than-average investment volumes in commercial real estate. By September, about €1.4 billion had been invested, and it is expected that the year-end figures will reach about €2 billion.

While all sectors experienced declines during the year, short- and long-term outlooks are varied, as sentiment and performance across property types remain bifurcated. The living sector continues to be the most active in Ireland, although fundamentals are more muted, and the strains around borrowing are starting to filter through. Investor sentiment for logistics is still positive even though fundamentals are cooling, propelled by an economy tapering after several years of strong performance. Despite these changes, rents remain at record highs. Additionally, capital values are relatively robust, as seen in the latest JLL Ireland Property Index report. Office pricing and liquidity continue to be under pressure amid weak global sentiment from investors and lenders. The sector has faced several challenges over the past 12 months. However, signs of recovery are evident, with active office leasing requirements in Dublin increasing 57 per cent from the previous year. Furthermore, prime headline rents remain stable for “best-in-class” space.

In 2023 retail differentiated from long-term averages, with a 26 per cent market share in the opening three quarters of the year, its largest market share since 2017. Retail is likely to continue to attract a wide array of investors due to the sector’s favourable returns. Additionally, the fundamentals are steady, with footfall increasing, supported by the recovery in international travel and softening but still resilient labour markets. The sector will probably see some of the market’s more significant one-off deals in 2024, with a few notable shopping centres on the market.

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One trend we expect to emerge out of the gate in 2024 is the narrowing of the bid-offer spreads, with vendors selling out of necessity rather than choice.

What’s next?

2024 will be a year when there will be substantial interest in alternative asset classes within the Irish market. In particular, infrastructure, data centres and renewable-energy projects will be at the forefront of funds seeking stable returns that might not be evident in traditional sectors. We have noted in recent months that property funds are beginning to reassess their investment strategies to allow investment in infrastructure that previously did not fall under the property umbrella.

We need to talk about the 48 million square feet elephant in the city

The office market is undergoing a significant reset period, and it is becoming impossible for anyone in the sector to ignore the growing divide between the “best-in-class” properties (estimated to make up about 38 per cent of Dublin’s existing stock) and the rest. It is worth noting that no buildings under construction in Dublin are scheduled for completion after 2026.

The decreasing availability of “best-of-class” properties will present a challenge within the market, as occupiers are increasingly expected to meet ESG targets by 2030. In other words, despite a market size of 48 million square feet and a vacancy rate of 14.4 per cent, there will be a need for more suitable spaces. The effects of this undersupply will become evident by the end of 2025. Buildings that do not adhere to the latest green accreditations are not just at risk of becoming stranded, but rather, they will be stranded.

Rent control

Finally, living investment must be fostered and encouraged to boost the supply of new homes in the country. International institutional investors have been a driving force in creating supply over the past decade, bringing in capital to build that is not available domestically. Rent control, while well-intentioned, has been shown across Europe to hurt the supply of new homes. Rent-control policies that restrict rental price increases without addressing the underlying factors contributing to housing supply and demand imbalances may have limited effectiveness in the face of rising housing demand.

We encourage future housing policies to focus primarily on increasing the construction of new housing. Only when housing supply has met demand will rent controls have the potential to curb excessive rental growth. Adopting a comprehensive approach that integrates rent regulation with proactive measures to stimulate housing construction and foster affordability is imperative. By implementing such a multifaceted strategy, we can attain sustainable housing affordability outcomes for all.

John Moran is chief executive and head of capital markets at JLL Ireland