The impact of higher interest rates on property valuations, combined with softening demand in some sectors such as offices, has brought commercial real estate sharply into focus in 2023. However, it is important to understand the nuances of commercial real estate at this point, including the differences across sectors and geographies, the influence of structural demand drivers such as a growing population and the effect of the increased focus on energy efficient buildings.
Like the rest of Europe, commercial asset pricing in Ireland has adjusted over the last 12 months. At this point, Dublin offices, particularly older or non-core located buildings, have seen the sharpest valuation declines. Conversely, we continue to see strong occupational and investor demand for industrial & logistics property, retail warehouses, shopping centres, hotels and residential buildings, and this has provided some support to valuations in these sectors as interest rates have risen. The dynamics of demand and supply in each sector need to be understood in order to get a clear picture of where rent levels and property pricing will go in the next
12 months.
Offices
While the rise of flexible working patterns has led to a dampening in demand for office space, it may not be by as much as many anticipate. The biggest businesses still require office space, and in many cases, they need the same amount of space as pre-pandemic. It is important to note that demand for Dublin office space at this point remains close to the long-term historical average. At the end of Q3, demand requirements for Dublin offices totalled 2.4 million sq. ft, which accounts for one full year of gross Dublin office take-up. Demand is driven by professional services and financial services companies and the focus from a location perspective is the very core of the city centre.
Like the rest of Europe, commercial asset pricing in Ireland has adjusted over the last 12 months. At this point, Dublin offices, particularly older or non-core located buildings, have seen the sharpest valuation declines.
Sustainability factors are influencing the office sector more than any other sector in commercial real estate, with demand from occupiers and investors largely focused on the most energy efficient buildings. As such, prime located, sustainable office buildings will continue to enjoy strong demand in 2024. However, the Dublin office vacancy rate has now risen to close to 15%, its highest point since 2014. And considering the level of newly constructed office space that will be delivered to the market in the next 12 months, it is likely that the vacancy rate will be higher again at the end of 2024.
Retail
The retail sector both globally and in an Irish context has enjoyed a revival in 2023. Retail warehouses and retail parks, both in Dublin and regionally, now have little vacancy, and rent levels are showing signs of growth. Similarly, shopping centre vacancy rates across the country have fallen sharply. Retailers have now fully adopted omnichannel strategies, combining physical stores with online platforms, and this is clearly the most efficient way of serving customers in an increasingly digitalised world. This revival in the retail occupational market alongside the higher yields these properties offer, combined with the fact that new construction in the
sector has reached a halt in recent years, has made these types of buildings a particularly attractive investment proposition. The retail sector has accounted for 25% of all investment spend in Irish commercial real estate so far in 2023, its highest proportion since 2017.
Industrial & Logistics
The structural demand drivers in industrial and logistics are widely known at this point. Dublin and the Irish regional markets remain undersupplied of modern distribution and warehousing facilities. There is currently
c. 1.3 million sq. ft of new industrial & logistics stock under construction that will be delivered in the next 12 months in Dublin, and 40% of this space is already prelet or reserved, while the remainder will be leased up
quickly. Investment in the sector continues to be strong and indeed the largest Irish investment transaction of 2023 was a portfolio of modern logistics buildings in west Dublin.
Residential
Outside of the traditional core commercial sectors, the undersupply of residential stock across tenures including rental, owner-occupier, student and social housing remains a key issue for the Irish economy. Over 2023 and 2024 we expect to see the peak of private rental sector apartment construction. Notable new developments delivered in 2023 include Coopers Cross (471 units) and Spencer Place (329 units) in Dublin 1. While in 2024,
Alta Verde in Blackrock (241 units) and the first phase of Grand Canal Harbour in Dublin 8 (which totals 596 units in its entirety) will reach practical completion. These modern, high specification, sustainable buildings are a huge positive for the market, delivering the rental supply that Dublin requires. Outside of private rental apartments, social and affordable housing has been a key feature of the market in 2023. Approved Housing Bodies are now the most active acquirers of new developments
in the market, providing affordable housing options and going some way to addressing the gap that has existed in this segment of the market for many years now.
Outlook
Looking into 2024, our key expectations are underpinned by a likely stabilisation in inflation and interest rates, combined with some declines in sovereign yields, all of which will prove a positive catalyst for real estate
investment activity and valuations, particularly in the second half of the year.
Director, Head of Research, CBRE Ireland
