The rapid unwinding of the low interest rate, low-return environment that followed the global financial crisis was always going to disrupt a property market that had fed off a decade of virtually free money. What is remarkable is how investor sentiment towards the office sector has deteriorated far more than elsewhere, something that is being particularly keenly felt in Dublin.
As the dominant sector for investment in Irish commercial real estate, Dublin’s office market has a more volatile history than almost any other in Europe, a legacy of the boom-and-bust era of the mid to late 2000s. Dublin’s market may have a greater presence of institutional capital today, but it is not immune to structural changes afoot in the sector.
July to September was the worst quarter on record for European office sales, while deal flow in Dublin is back at the levels of 2012, when the market was suffering from the post-crisis hangover and emerging from the euro-zone debt crisis. Average transaction yields for Dublin offices have moved out by 150 basis points since the end of the pandemic, leaving prices and valuations down 19 per cent from their post-crisis peak. Dublin ranked behind Amsterdam and London for the largest annual capital value declines in significant European office markets at the end of June.
Some of the dialogue around the European office market’s prospects has been shaped by trends spilling across the Atlantic, where hybrid-working trends have depressed occupancy levels in San Francisco, Seattle and New York to well below pre-pandemic levels. Nevertheless, businesses are looking to rationalise and decarbonise their office footprint, requiring serious decisions by prospective and current office owners.
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Data show a polarisation in European and North American office markets between best-in-class buildings and the rest. Pricing is largely holding up for newer buildings and those meeting energy efficiency targets, whereas there is significant weakness for the rest of the sector. Conversion is often mooted as solving potential oversupply, but it is difficult and expensive to transform purpose-built offices into a hotel or apartment block.
The message is clear: sellers would have to reduce reserve prices significantly further to draw buyers back into the market
There is ample evidence that uncertainty in Europe’s office sector is impacting liquidity and pricing. European deal flow has never been lower, and modelled data from MSCI’s Price Expectations Gap show a 20-35 per cent gap in buyer-seller price expectations in Europe’s core office markets. Although sales activity in Dublin is too low to gauge its pricing gap, the message is clear: sellers would have to reduce reserve prices significantly further to draw buyers back into the market. This is supported by anecdotal evidence of offices trading at significant discounts, such as the prospective sale of Dublin’s Elmpark Campus by Starwood.
When sellers are motivated or forced to trade assets, distress often establishes price discovery. Data show that it takes several years after a crisis for distress to translate into transactions, as Ireland knows from its painful experiences post-financial crisis. In the current higher-for-longer interest rate outlook, how interest rates evolve and creditors behave will determine pricing prospects for offices in Dublin, as it will for markets across Europe.
Tom Leahy is head of EMEA research at MSCI Real Assets
