Dublin Office Prices Need To Fall Significantly To End Buyer And Seller Standoff

In the past 12 months, Dublin’s office market has only had two speeds — warp speed and zero. Right now there may be dry powder ready to invest and sellers prepared to offload, but a pricing mismatch means activity has reduced to a trickle.

Given the ongoing uncertainty swirling around Europe’s commercial real estate hubs, there is little prospect of anything changing quickly. But investors in Dublin are more confident that the market will unlock in the second half of 2023.

“The two big macro factors are inflation and the rapid rise of interest rates, as we're seeing the impact of quantitative easing, with inflation clearly at unsustainable levels," Hines Managing Director Peter Lynn told a packed audience at Bisnow’s Shaping the Future: Dublin’s Real Estate Outlook event on 4 May.

"The impact on property yields is only beginning to show through and investment volumes are showing that as no one really knows the prices of anything. It's making decision-making extremely difficult.”

Lynn warned that both the office investment and occupational markets are difficult right now, and those factors will continue to limit growth for the time being.

“The issue is around pricing and debt level costs and the latter [increased cost] has to be reflected in yields," he said. "Funds are looking at acquisitions and conversions of existing stock but the price needs to fall significantly."

“There is a lot of dry powder, the Irish picture is still positive,” he added.

He also pointed to the growing diversification of sectors looking for space in the Dublin commercial real estate market and said that tech firms would not start to desert Dublin because of how established the sector has become in the Irish capital.

"The government and IDA did an amazing job regarding attracting technology companies," he said. "But we have also seen growth in pharmaceuticals, aviation, professional services and more. International investors have come for the tech story, and I still think that there is enough of an ecosystem here that would be hard to replicate elsewhere. Tech firms are still in the market, still looking for space. I can't see them sailing off."

MARK Managing Director, UK & Ireland, Lily Lin said the “likability” of the Dublin market was also a factor not be underestimated.

“Dublin has always punched above its weight," she said. "For a midsized group like us, the question when it comes to a smaller market like Dublin is how much can we deploy and how quickly. We’ve grown a lot in beds and sheds/last-mile logistics and for offices we have to ask is if there is enough [investment] to deploy. If we can't, then that's always a consideration, especially when it's so competitive."

Although she said that the current adjustment by technology firms is a concern, she pointed out that with the technology giants has also come a raft of ancillary businesses and that technology firms are “known to grow and shrink quite quickly”.

Rather, she said the company has been “pleasantly surprised” by the variety of industry sectors interested in taking space in Dublin and the strength of their covenants.

“The Brexit story is another factor, in terms of the city being a very professional English-speaking hub that is still in the EU. So it’s not all rosy but the situation has been overdone,” she said.

"As landlords, we have been rolling with the punches and have been talking about money in the system for a long time. Right now it’s about being patient and working harder for every deal. We have seen the ‘hotelisation’ of real estate and that means putting in more capital to create the best of the best,” Lin said.

Aviva Looks For Flexible Investment

The ever-changing situation has also seen funds approach the market differently, and Aviva has combined its two Irish property funds into one portfolio and widened the original mandate, which was centred on retail, offices and logistics. That enables it to consider retrofit opportunities and broaden into alternatives.

Aviva Ireland Head of Property Suzie Nolan said that the current buyer/seller standoff was making movement in the investment market challenging, but said that it also reflected the relative strength of the players operating in the city.

“There is not enough Grade A office space coming to market. But that’s because thankfully we're not in a forced seller market, so until vendors feel they will get value they won't sell,” Nolan said.

“I see two pools of investors. There are the Grade A funds, looking for bond style acquisitions. There are also investors willing to take on risk of greening a building. You can see rental levels achieved for higher-efficiency buildings at about a 10% premium, so now there is a good reason to take the leap to spend the money and green the building,” she said.

Aviva is moving toward a Grade A rated portfolio and Nolan said that the traditional mantra of “location, location, location” is being replaced by corporate occupiers being prepared to move to almost identical locations in order to work from higher ESG and amenity offices.

The speakers also turned to the theme of retrofitting Dublin’s legacy office space and the financial viability of conversions.

BentallGreenOak principal Allen Crampton said that there will, inevitably, be stranded assets and added that occupier sentiment would move away from “shiny vs. old” and toward “the smartest buildings because their stakeholders care”.

“Conversions will be difficult, because you can change a building but still have an inferior product," he said. "Some of these buildings will come to end of use. In Dublin one obvious possibility is offices to residential, I think we'd rather do that than bring an old office building into the new world if its fundamentals are inferior to new developments.

“Our experience is that until you get under the hood you don't really know what you're getting into. So new players will need to feel they are the right side of the buy before they take on the risk,” Crampton added.

Despite the challenges and uncertainty, Colliers Director and Head of Capital Markets Michelle McGarry said she believed that international investors wanted to be in Dublin, but acknowledged the lack of product, and she said that the quiet first half of the year was a reflection of little quality product and meaningful lot sizes currently available.

“There is undoubtedly a mismatch in pricing between buyers and sellers," she said. "What I would say is that if you're not ready to sell [at a competitive value] then don't come to the market."