Changing Landscape of Commercial Real Estate in Ireland: Opportunities for Home Builders and Investors

The Irish Times has published a series of thought-provoking articles this week about the state of commercial real estate, in Ireland and beyond, that are well worth catching up on. One takes us back to 2008, explaining how the global financial crisis was predominantly fueled by overpriced residential property values, which had a cascading effect on the Irish property market. However, in the present economic climate, it is the commercial real estate sector that faces challenges. Stretched valuations and the structural shift towards remote work have led to increased vulnerabilities in commercial property.

The Vulnerability of Commercial Real Estate
The Irish Central Bank’s recent Financial Stability Review highlights concerns over stretched valuations and increased international financing in the commercial real estate sector. The rise in interest rates and the growing trend of remote work have compounded the challenges faced by commercial property companies. These companies, which heavily borrowed to fuel expansion, now face significantly higher refinancing costs. Dublin, the primary commercial hub in Ireland, has witnessed a rise in office vacancy rates, outpacing other European locations. Despite the increased vacancy, Dublin’s office pricing has not adjusted to the same extent as the European average. This discrepancy has resulted in a pause in investment sales, particularly at the prime end of the market.

The Impact on Office Leasing
The occupier market, crucial for landlords leasing office space to businesses, has experienced a slowdown due to rising interest rates and slowing economic growth. The advent of hybrid working has enabled employers to reduce their space-per-employee ratios, further impacting office leasing. Dublin’s reliance on the information and communication technology (ICT) sector for office take-up has contributed to the decline in office leasing. With significant job cuts in the global tech industry and the prevalence of hybrid working, the share of Dublin office take-up from the ICT sector has halved in the past 15 months.

Opportunities for Home Builders and Private Investors
While the challenges in the commercial real estate sector may raise concerns, they also present opportunities for home builders and private investors. The adjustment in pricing, particularly in Dublin, may attract investors seeking value in the market. Ireland’s demographic profile, cultural links, and successful foreign direct investment model remain attractive factors for investors. As large multinational companies plan to reduce office space, there is a potential shortfall in supply, which could lead to increased rents for prime buildings. This presents an opportunity for home builders to cater to the changing needs of businesses by providing flexible and adaptable office spaces.

Private investors can also explore alternative sectors, such as residential and mixed-use developments. As remote work becomes more prevalent, there may be an increased demand for housing outside major urban centers. Investing in residential projects that cater to the evolving needs of remote workers could yield favourable returns.

The business of real estate has always been about adapting to the changing market dynamics and focusing on value-driven investments; the skill remains in investors’ ability to recognise the shifting landscape and position themselves to thrive as market trends evolve.

Ian Lawlor
086 3625482

Managing Director 
Lotus Investment Group