Office landlords, battered by a global crash, have been clinging to the hope that new buildings with strong green credentials will still demand top rents and prices. Dublin is emerging as a cautionary tale that such optimism may not hold up.
In the city’s North Docks district, new buildings are falling into bankruptcy protection after US tech firms scaled back the amount of new space they leased and borrowing costs rose.
Values are already down 40% to 50% from their peak, according to investors and brokers, who expect price declines and strains in financing to continue in coming months.
The slump is playing out in an area best known a decade ago for the unfinished shell of a new headquarters for Anglo Irish Bank after its demise helped tank the economy during the financial crisis.
Ireland’s subsequent rebound was driven in part by the expansion of firms such as Alphabet Inc and Meta Platforms Inc. That boosted demand for work space, and developers rushed to provide it, until Big Tech’s expansion halted amid a focus on costs after a hiring binge during the pandemic.
“The tech sector has more of a remote working culture than many other industries, which seems to have become even more entrenched owing to the pandemic,” said Sue Munden, a senior research analyst at Bloomberg Intelligence. “Tech clusters such as Dublin may be more vulnerable by any pull-backs in space demand by the industry.”
Troubled Buildings
Dublin’s docklands have been radically altered in recent years, with an economically deprived quarter of the city transformed into a business and residential neighbourhood beside the River Liffey. But there’s been a growing number of troubled properties in the North Docks part of the area in recent months.
This story is based on interviews with more than 10 investors, asset managers and brokers, who asked not to be identified discussing private information.
A building leased to Meta in the area was seized by a creditor last year, while veteran developer Johnny Ronan saw a number of assets, including an office block there, enter a consensual restructuring process late last year. Ronan declined to comment.
Since then, Pacific Investment Management Co appointed receivers to a North Docks project developed by a venture that includes the National Asset Management Agency, the country’s bad bank. The buildings may sell for less than the value of the €120 million (R2.4 billion) senior debt provided by Pimco, according to two brokers with knowledge of the matter. Nama and Pimco declined to comment.
Investors also lost control of a block leased to WeWork, while five people with knowledge of the matter expect more buildings constructed around the city in recent years to enter receiverships in the coming months.
It’s part of a wider global downturn that’s hit commercial property valuations from New York to London and Hong Kong, with implications for developers, investors, banks and other lenders. More commercial real estate loans will run into trouble this year as office tenants cut space, according to Fitch Ratings, making refinancing harder and leaving older buildings at risk of being left empty.
Credit Exposure
In Dublin, office leasing in the first quarter fell to a decade low, excluding the pandemic, according to Jones Lang LaSalle (JLL). Ireland’s central bank governor, Gabriel Makhlouf, said earlier this year that regulators were “keeping a very close eye” on commercial real estate but “at the moment we feel that the system is resilient enough to manage the falling valuations”.
One reason for optimism is that the downturn won’t hit Irish banks anywhere near as hard as in 2008. Instead, much of the financing this time around was provided by private credit firms.
At the moment, some lenders are largely ignoring breaches of loan covenants linked to a property’s value, several people said, holding off partly in the hope that expected interest rate cuts will stimulate a recovery of sorts.
Still, one insolvency expert expects that patience with borrowers will run out in the second half as receivership sales bring more clarity to valuations.
Work From Home
In the Irish capital as in other places, landlords and lenders have been caught out by the prevalence of work-from-home among tech workers in the aftermath of the pandemic.
Tech firms agreed to rent almost 90% less space in the fourth quarter of last year compared with the first quarter of 2019, according to data compiled by broker Lisney. Many of the buildings were leased before completion, known as pre-letting.
“With Big Tech effectively now gone from the pre-letting market, the most active demand from occupiers is from small and medium enterprises who typically take space for 20 to 80 people compared with several hundred for larger tech lettings,” said James Mulhall, managing director of broker Murphy Mulhall. “This, combined with hybrid working models, means it will take longer to fill up office buildings.”
One investor said Dublin office developers had in recent years tried to maximise values by boosting density at the lowest possible cost, rather than constructing buildings desirable to tenants and workers.
While that didn’t matter as much when there was a shortage of high-quality buildings, occupiers will now have more choice. There will also be downward pressure on rents as tech firms move to offload space they no longer need. That excess space is at a record high in Dublin, JLL says.
Salesforce, which continues to hire, is weighing the sublease of 80 000 square feet (24 300m²) in the North Docks, according to people with knowledge of the matter. The company declined to comment.
Ireland’s central bank, which eventually redeveloped the Anglo Irish building as its own headquarters, is seeking to sublease about 105 000 square feet (32 000m²) of offices at one property and is also selling some space in the area, a spokesman said.
There’s huge uncertainty about where the market goes next. Allied Irish Banks Plc’s base case is for commercial property prices to fall 2.5% this year. Rival Bank of Ireland Group Plc sees a much deeper decline of 11%.
AIB already took what it described as a “large charge” of €327m last year, a chunk of it linked to offices. Loans to property and construction where credit risk has increased doubled to €2.8bn. The lender believes the bulk of the downturn has taken place, a spokesperson for AIB said, and there may a modest recovery from 2025 if monetary policy is loosened later this year.
Real estate experts say it will be at least two years before the market sees an upswing, but with new construction drying up, future demand will benefit owners of the best buildings with green credentials, especially ahead of the target to slash carbon dioxide emissions by the end of the decade.
“In the medium term there will be demand, but it will just be smaller lot sizes to cater to the new normal,” said Aoife Brennan, a senior director at Lisney. “ESG promises will also play into it, so the demand will be for top quality, energy efficient buildings.”
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