Office Market Has Hit Bottom, But Real Recovery May Not Be Until 2026

The worst might be behind Dublin's embattled office sector, but it is likely to be a slow road back to full recovery for the market.

That was panelists’ view at Bisnow’s Ireland Office Summit: Attracting the Workforce event at The Eight Building on Wednesday.

“We’re close to the bottom of the market, but with some headwinds ahead. And there’s always a lag of between 12 and 18 months in terms of increased activity playing out in a recovery,” Mapletree Investments Director and Head of European Commercial Asset Management Fiona Lyons said.

She and the panel cautioned that only once the new supply had eased off would the commercial real estate sector be in a position to move forward, even though occupier demand looks more robust. 

“It looks like the remainder of 2024 and 2025 won’t see huge changes, so for the recovery, we’re looking at 2026, with sustainability also a major driver of new space requirements,” she said.

However, Lyons also warned major corporates that they should not wait too much longer before deciding on their next moves. The coming slowdown of the development pipeline will impact availability more quickly than many believe — especially if they assume that refurbished older stock will mean they still have a broad selection of possible locations, she said.

“Repositioning will be fundamental, but there is no such thing as a quick refurb,” Lyons said. “Developers will need to start now in order to have stock ready for when the new development pipeline freezes up. So we need to be thinking about those refurbishments now, especially given that we believe that there will not be a huge rent or demand differential between new-build stock and those refurbished to a high standard.”

Kennedy Wilson Head of Acquisitions and Commercial, Ireland Stefan Foster said that while “hybrid work is here to stay,” back-to-work numbers are improving. He said that although office agents were “probably pretty depressed” after the first quarter, more activity is happening now.

“Uncertainty has put the market on pause,” Foster said. “And there has been no NAMA this time or 90% loan-to-value borrowing among developers.”

For occupiers, the concern is not so much about rent levels but about capital expenditure, he said. Tenants are still working out their space requirements, and they are cautious about fit-out costs.

“Choosing space has become much more employee-centric, which means location and amenities. We’re back to location, location, location,” he said. “One street off can have an impact, especially in Dublin, which lacks the microhubs of many larger cities.”

Because there is little to no new space scheduled to come to market after 2026, Foster said he believes office vacancy is peaking now, which will also put the focus on refurbishment opportunities.

“Some sites will work, some sites won't. Some won’t be offices again. But supply and demand will change, helping the retrofit market,” he said. “We’re through the worst. This is a good time as a tenant to be looking for space.”

Aviva Life & Pensions Ireland DAC Head of Property Transactions Natalie Brennan said Dublin is not alone in the challenges its commercial real estate market faces.

“Let’s not forget that this has been a European-wide phenomenon, but offices remain around 20% of all assets being held,” Brennan said. “What we’ve seen is sellers cautious about bringing properties to market because they want to have competitive tension among buyers to get the best value. A lot of the deals being completed started perhaps 12 months ago, so occupiers are being sluggish about making decisions.”

Brennan said tech activity, which had previously driven much of the space uptake in the city, remains at about 10% of the deals this year. But financial services, the public sector and other occupiers like Citi, EY and BNY Mellon have led the takeup of new locations.

“Occupiers have best-in-class requirements, so rents at €62.50 per SF are holding up in the city centre,” she said, especially given the focus on quality buildings and locations. “The viability of refurbishment is often building- and location-specific. The cost-to-benefit equation is far less clear for out-of-town offices, and it is not going to work for every location. Inevitably, there will be a flight to quality in the city centre.”

One company that has a mix of campus and city centre buildings is Fine Grain Property, and Chief Operating Officer Darragh Lennon said the opportunities for refurbishment are being held back by the differential between seller and buyer expectations.

“There remains a gap between buyers and sellers for properties that have a lot of capital requirements,” he said. “The simple fact is that the banks are still loaning, but on different terms, and if they are not lending as much and on higher interest rates, then buyers don’t have as much capital to spend on acquisitions.

“In addition, yields didn’t move up with higher interest rates, which means real estate has been competing with other investment vehicles.”

Fine Grain’s tenants often have a preference to stay where they are, he said, so the company is working with them to upgrade standards, particularly around meeting environmental, social and corporate governance requirements.

“This also avoids a lot of embedded carbon emissions. We need to find more ways to reposition assets for occupiers and for ESG,” he said. “What the market wants to see is all the recent uncertainties settle down, and if that happens, then there is a good path to recovery.”

Bisnow’s next Dublin event is Ireland's Residential Investment and Development Conference at the Aviva Stadium on 21 November.