Opportunities Remain In Dublin's Maligned Secondary Office Market

Rental growth and high occupancy levels are still possible in Dublin’s much-maligned secondary office market, according to multitenant property specialist M7 Real Estate, with the Anglo-Irish investor actively looking to acquire more suburban office space.

M7 has achieved strong rental growth across its suburban Dublin offices, reporting 30 leasing deals over the past 12 months for its pan-European fund M7 EREIP VI.

And despite the well-documented challenges to the city’s office sector after the tech slowdown and rising interest rates, M7 Real Estate Ireland Managing Director John Murnaghan told Bisnow that a granular approach is paying off for the business.

“I fully appreciate that there are significant headwinds and some dark clouds for Dublin’s office market, plus a lot of grey space coming to market," Murnaghan said. "However, we believe a granular approach and careful site selection mean that the secondary market remains potentially very lucrative.” 

Following the most recent 4,200 SF letting to St. Vincent’s Hospital at M7's Nutley building, Merrion Centre, Dublin 4, the asset is now at 100% occupancy, with M7’s wider property portfolio increasing to 97% let. 

Leasing activity has generated rental growth for the fund of close to 12% across its suburban office portfolio in Dublin, the company said, and it has also extended its portfolio weighted average unexpired lease term to over four years.

EREIP VI’s Irish portfolio includes more than 200K SF of office space, predominantly acquired over the last year, with leasing activity at Sandyford Business Centre, Nutley Buildings, Merrion and Swords Enterprise Park.

Murnaghan has focused on building the Irish business, and a spate of new lettings include Oomi Travel, Fingal County Council, Silicon Highway, Irish Centre for Cycling, Baxter Healthcare, RFC Security, Kavanagh Forensics and O'Brien Landscaping. In addition, renewals include the Embassy of Japan, AC Neilson, Peter Finn, Eurofins Biomnis Ireland, Arkphire Ireland, Bonkers and Oliver Sears Gallery.

"Our core strategy is to acquire in-town buildings in affluent suburbs of Dublin, where there is little or no office stock," Murnaghan said. "The Nutley building is an example of that because it is the only office building in the area. So we may be dealing with limited demand [compared with the CBD], but absolutely no supply.

"There are a number of tenants that need to be in these micro-locations. We have also made a point of broad diversification to reduce risk, so I don’t lie awake worrying about the fate, for example, of the tech sector or the legal market."

A key part of M7's strategy is also to improve the sustainability credentials of the portfolio through targeted capital expenditure, he added.

M7 Buying Office Space

Murnaghan said that the company is actively looking to acquire further office assets and more industrial and logistics sites, but he expressed frustration with a “disconnect” between vendor and buyer expectations.

“In London, we have seen rapid repricing, but that’s much slower in Ireland,” Murnaghan said of the transactional environment. “Perhaps it’s because it’s a smaller market and people feel more personal about the deals in Dublin. But right now, that is causing a lot of inertia.” 

The Dublin commercial real estate market remains very quiet, and in its annual Crane Survey, Deloitte recorded just 21 planning applications in excess of 10.7K SF for purpose-built offices in Ireland for 2023, the majority in Dublin. 

These applications amounted to just over 3.2M SF of gross office space across 15 applications, of which the largest application was outside the city centre with the development of five office blocks on Blackthorn Avenue in Sandyford Business Park, Dublin 18.

In its July update, agent Sherry FitzGerald reported activity in the Irish commercial property market had slowed to one of the lowest levels on record in the second quarter of 2023, with only 26 transactions closing. Turnover for the three-month period was an estimated €333M, also close to a record low.

For the first half of the year, capital spend reached €985M, less than half that seen for the same period in 2022, and Sherry FitzGerald Senior Economist Jean Behan pointed also to the size of transactions, with 58% in the €1M-€10M range.

Investment activity in the office sector is likely to remain suppressed in the medium term as occupiers continue to streamline their space requirements, although demand for high-quality accommodation remains “very strong,” the report said.

Achieving environmental, social and corporate governance targets is also becoming increasingly important, the agent said, continuing to place downward pressure on older stock valuations and resulting in a “brown discount” as opposed to a “green premium,” the report said.

Suburban Take-Up Near City Centre Level

Meanwhile, BNP Paribas Real Estate Ireland’s latest report on the office sector found that just under 710K SF of office space was let between January and June, down over a quarter on the same period in 2022 and almost a third below the 15-year average.

With 97 lettings in the first half representing an almost identical number to H1 2022, average deal size fell from 10.2K SF in H1 2022 to 7,300 SF in the first six months of 2023. Downsizing moves accounted for 21% of the space that was leased in Q2, up from just 3% in Q1 

Take-up was reasonably evenly split in Q2, with 40% in the city centre (Dublin 1, 2 and 4), 39% in the suburbs and 21% in the Dublin fringe (Dublin 3, 6, 7 and 8), with rents at €61 per SF in the centre and €34 per SF in suburban locations.

While around 95% of M7’s holdings are within or around the greater Dublin area, the company does have an industrial site in Galway and would look to opportunities around the country, notably Cork. However, Murnaghan said that the company sees better value in Dublin at present.

“In terms of investment, in my view, the differential between asking prices in Dublin and Cork is not big enough,” he said.