Tech Pullback Sends Dublin's Office Market Towards A Rent Tipping Point

What happens to an office market when the sector that accounted for half of the take-up over four years suddenly goes into reverse? When tech companies, instead of hiring warm bodies as fast as they can find them, are laying off hundreds of thousands of staff across the globe?

Dublin is about to find out.

Dublin’s commercial real estate market has ridden the digital wave hard over the past few years, with the global tech giants in a grade-A space race within the city.

But recent layoffs among the leading digital firms worldwide — most recently Zoom — and a pullback from their breakneck expansion have rattled the city’s commercial property sector, with concerns rising that macroeconomic woes will pour ice water on a hot market.

Other sectors are stepping up, with big financial and professional service firms taking up some of the slack. But new data from BNP Paribas Real Estate suggests that a correction started late last year. Tech firms, half the leasing market since 2017, accounted for just 12% in 2022.

And the questions investors and landlords want the answers to are just how far and how fast the market may dip and whether any shortfall in demand or rent softening will be a short-term blip or the shape of things to come.

BNP warned in its market update for the fourth quarter of 2022 of a more challenging year for commercial real estate, with vacancy rates likely to peak at about 15% later in 2023 compared with 12.5% last year, it reported.

While BNP Director of Research John McCartney said that those figures are not wildly out of kilter with longer-term trends, he said that around an 11% vacancy rate is typically the “tipping point” for rents to start trending downwards.

“I don’t hold with the view argued in some quarters that the focus on taking grade-A offices means that this will only affect older stock,” McCartney said. “That’s an argument for a ‘synthetic rate’, but history tells us that this is enough to soften rents across the whole market.”

Office Space Strong In 2022

Office take-up actually rose 63% last year to 2.67M SF, but the slowdown in the global technology sector “restricted the market” and threatens to hit rents this year, BNP Paribas Real Estate said, while McCartney also reflected that the steady flow of new supply coming to market this year would be difficult to absorb.

“People tend to get fixated on the new space, which looks likely to be around 2.48M SF this year,” he said. “But the real issue is that very little of the existing space is being knocked down, so actually, with relocations leaving previous buildings available, the total amount of space that needs to be absorbed is more like 4.5M SF.

“I can tell you the last time that sort of space was absorbed in Dublin: never.”

However, he was far more upbeat about prospects beyond the next 12 months and said that with new development “peaking in this cycle” in 2023, and the main economic indicators painting a more positive outlook than even in late 2022, there is every prospect of Dublin’s commercial real estate market recovering fairly quickly. 

With relatively few new offices set to come online after 2023, the data should help investors maintain a positive medium- and long-term perspective, BNP said in its report.

Indeed, the current impasse is coming after a fast post-pandemic recovery, with leasing activity in most sectors reaching pre-pandemic levels by the end of 2021 and surging above those levels in 2022. Prime rents were stable at €62.50 per SF annually last year, up 8.7% on 2021 with global occupiers “heavily focused” on modern offices in the city centre and docklands.

Will Other Sectors Step Up?

CBRE Ireland said that Dublin office take-up was 807K SF in Q4 2022, 17% below the 10-year Q4 average of circa 970K SF. It highlighted prime city centre yields softening by 20 basis points in Q4 2022 to 4.35%, while secondary and prime south suburbs sat at yields of 6.25% and 6.5%, respectively.

There are also positive signs that other sectors are still active despite global economic turbulence. In January, EY Ireland started the search for a new Dublin headquarters of up to 250K SF, with adviser Knight Frank appointed to manage the search process.

Deloitte Ireland is also reportedly on the lookout for a new headquarters, having issued a request for proposals for sites in August last year of between 150K SF and 210K SF, with agent Colliers advising Deloitte.

In early January, U.S. investment bank Citi agreed to a deal with RGRE at Waterfront South Central in the North Docklands in a €300M deal. Citi will occupy around 300K SF at the site. The other largest recent deal was an assignment agreed between SMBC Aviation Capital and the recently acquired Slack — which is moving in with Salesforce at its new docklands HQ — for 135.4K SF at the newly refurbished Fitzwilliam 28, Dublin 2.

An Post recently agreed to lease an additional floor at Exo, Dublin’s tallest office building, bringing the state postal service provider’s footprint at the building to a total of 83.5K SF across six floors.

The building’s joint letting agents, Savills and CBRE, said that there was “active interest” from prospective occupiers for Exo’s remaining 87K SF of office space, developed by EPISO4, a fund managed by Tristan Capital Partners and its local operating partners, SW3 Capital.

Hibernia Real Estate, now owned by Brookfield, has also started preparations for the demolition of the former Garda Dublin regional headquarters at Harcourt Square, which will clear the way for the developer to deliver a new headquarters office for KPMG. Scheduled for completion in February 2026, the new office complex will be able to accommodate more than 3,000 staff.

Indeed, CBRE Ireland said that it expects financial and professional service companies, plus the public sector, to account for a greater proportion of sales and leasing activity over the rest of the year.

Better Prospects For 2024

A number of pharma and life sciences companies have also announced plans to invest in Ireland, but the tech sector “is clearly the weak link” in the chain. Digital technology firms only took up 197K SF in the second half of last year, “accounting for just 11.7% of all take-up compared with a run-rate of 49.5% between 2017-2021″, BNP said in its report.

And startups and those looking for flexible space and flexible arrangements continue to suggest that Dublin remains a “hive of activity”, according to Grafter chief executive Emma Kennedy. With the flexible working provider set to open its fourth and largest Dublin location at the 27K SF Smyth House at 6-7 St Stephen’s Green, she said Dublin remains a major draw for businesses.

“Uncertainty tends to bode well for flexible space,” Kennedy said. “And I think we’re seeing a little bit of hysteria about the tech companies. In fact, while we did see some digital companies pull back late last year, a lot of them now have new requirements with us.”

Any layoffs or recruitment freezes also provide opportunities for smaller digital companies to recruit talent that may not have been available to them previously, she said.

“We’re currently looking for larger buildings of more 30K SF, and while our bread and butter is SMEs, we also see plenty of activity from large corporates, which is very encouraging,” she said.

BNP’s McCartney cautioned against the real estate community jumping to conclusions about how the market will evolve when it comes to the digital players and pointed to the city’s robust fundamentals.

“Let’s remember, we are not digital technology experts, so we don’t know exactly what their plans are, other than that their fortunes are generally aligned with the overall economic picture,” he said. “And new companies do appear and expand rapidly, as we have seen in Dublin, although we still don’t know the longer-term impact of remote working on office take-up.”