Fortune Favours The Brave: Spec Development Could Soon Return To The Dublin Office Market

Vacancy has just hit 16%. The tech giants are in freeze mode. But smart investors and brave developers could yet benefit from the Dublin office malaise.

A near freeze in the development pipeline and the likelihood of more distressed sales coming to market in 2024 mean that investment opportunities should finally open up next year, and developers prepared to build during the down cycle could benefit as their schemes come to completion, according to one of Ireland’s biggest developers.

“The deals will come when inflation tops out, which is when smart investors will come back and see that there is value,” Ballymore Ireland Managing Director Patrick Phelan said at Bisnow’s Future of Office in Ireland event in Dublin. “So the smartest deals will be done in the next 12 to 18 months. I feel we've bounced off the bottom.” 

Dublin office take-up slumped to 355K SF in the third quarter, down from 411K SF the previous quarter, according to adviser Colliers, as the overall vacancy rate hit 15.8% in Q3.

With no new office developments reaching completion in Q3, Colliers Director and Head of Research Kate Ryan said that speculative development has all but stopped, although the planning of new office schemes continues.

There is growing consensus that by late 2025, available space could once again be at a premium because of this virtual standstill in development, causing a shortage of good new buildings. It mirrors the situation in London, where Landsec announced this month that it is pushing ahead with the speculative development of a 380K SF London office building at Timber Square in Southwark. 

“In the short term, it’s about quality,” Phelan said. “We have looked at grey-space opportunities, and I am not calling the bottom of that market for that stock. But Grade A will be fine. It’s just all too noisy for the investment market right now. Everything is about Grade A. When you have choices, you buy the best.” 

Phelan said the way that Ballymore is assessing the viability of a new development has changed and that the company no longer bases the decision to build on the yield or likely rent, instead focusing on the development cost on a square footage basis and whether that makes financial sense.

“We are switching to a development price per square foot, which dictates if we build,” he said. “We don’t talk about rents and yields, but about cost per square foot. There is now more certainty about pricing to develop, because many of the drivers of the cost base have come off from their peak. That means a development is currently probably viable for prime Grade A. For secondary, probably not.”

Phelan said that the company has spent its money over the past two years on de-risking delivery and “making sure we have the right development product.”

In July, Dublin City Council gave Diageo and Ballymore's mixed-use redevelopment of the Guinness Quarter the go-ahead. The scheme will comprise two new hotels, five commercial office buildings and six residential buildings on the lands at Guinness Brewery to the south of James Street in Dublin 8.

The development will include the demolition of existing structures, mainly existing office and former industrial buildings, as well as the retention of key conservation features, including protected structures and site walls.

There are also commercial opportunities beyond Dublin, according to Ireland Strategic Investment Fund Senior Investment Director Sarah Hickey. The fund is Ireland's fast-growing sovereign wealth fund.

She said that as a fund that has to combine commercial investment with the economic impact of investment, it has been investing in Dublin commercial real estate since 2015-16 but sold its last office asset in the Irish capital since the pandemic began.

“Our remit forces us up the risk curve in terms of investment but also means it’s long-term, so we are through-the-cycle investors, almost contrarian investors,” she said, speaking at the Bisnow conference.

“Since the pandemic, we’ve been focusing on the Cork, Limerick and Galway markets, and we continue to be firm believers in the office market and Irish economy.”

She added that the fund looked at long-term trends and prioritised a strong location in an amenity-rich area while taking a data-led approach to assess supply and demand.

“In Limerick, we looked back at 20 years of data and how the market had absorbed space,” Hickey said. “We felt it would continue to be resilient, and we try to be in a supply-constrained market with the best building.”

In terms of the investment market, Hickey said that she felt that international investors had the money to acquire new buildings and refurbishments, converting brown assets to green buildings, but that pricing continued to be a stumbling block.

“The challenge is the bid-to-ask spread,” she said, adding that despite the focus on Grade A, not all deals will be for new developments.

“Refurbishment has to be part of the plan, [but] 80% of the stock [that will exist] in 2050 is standing today,” Hickey said. “We also see flex space growth. We would like to see flex represent about 15% of our portfolio, although it won't underpin the viability of development and is more suited to refurb, especially in Dublin.”

As far as the suggestion that obsolete offices could be converted to much-needed residential blocks, she said that the fund had looked at the opportunity — “or lack of opportunity.”

“Our view is that the cost means effectively repurposing will cost about the same as ground-up development,” she said. “Given the situation, I think it's challenging.”

Hickey also said current investment issues are not unique to Ireland, adding that once the market experiences more liquidity, aided by pricing adjustments, “Dublin will bounce back.”

Phelan said that in some ways, Dublin’s commercial real estate market was simply having to adjust to a more ordinary occupier scenario rather than riding the wave of demand led by the tech giants as the huge American and European digital players raced for space.

“Tech made life too easy,” he said. “We now have to look hard at the situation.”