The saying goes that if the US tech market sneezes, Ireland’s office market catches a cold.

So far in 2023, Dublin’s office market has shown symptoms of a downturn caused by a spending squeeze on the other side of the Atlantic. Led by the retrenchment in the hiring programmes of tech giants such as Meta, Google and Salesforce, activity in Dublin’s office market dropped by 42% in the first three months of the year compared with the same period in 2022. The question is whether the current sentiment is a harbinger of things to come or just a blip for Ireland’s booming tech industry.

“People would say it is a buyers’ market, but the sellers don’t know that yet,” says Tony Grant, Director at Hollis Ireland. “We [Ireland] are sensitive to higher funding costs and tightening credit that is available to borrowers.” Developers are certainly looking at their spreadsheets and crunching numbers again. What might have made sense a year ago perhaps doesn’t anymore.”

Overall, office leasing did pick up in the second quarter, with Colliers’ market report for Dublin stating that take-up stood at 410,706 sq ft, compared with a Q2 five-year average of 296,510 sq ft. However, according to BNP Paribas Real Estate’s Dublin office market report, office activity for the first half of 2023 was at its lowest level – aside from the pandemic in 2021 – since 2012, with 708,835 sq ft of purpose-built space let. BNP Paribas noted that tech accounted for only 12.6% of take-up in the three months to the end of June, with financial and professional services firms picking up the slack.

“What we’re headed for is a mild level of oversupply, which will peak towards the end of this year,” says John McCartney, director and head of research at BNP Paribas Ireland. “On the supply side, we are going to have a strong second half of the year this year. We had around 200,000 sq m delivered last year, which was the biggest delivered for the Dublin market since before the financial crisis in 2008. “The pullback in tech means the absorption won’t be sufficient to digest all the space that is coming to market.”

Tech trend

The dwindling appetite for tech firms is part of a longer-term trend in Dublin, which once saw almost half its requirements snapped up by tech, media and telecoms firms. “We were quite reliant on the large tech companies growing, which was around 40% to 45% of our take-up,” says Rita Carney, senior director in office leasing at JLL. “It is about 25% of take-up in other markets across Europe.”

According to Carney, the return to office work in Dublin is around 12 to 15 months behind other cities such as London. “We are noticing some demand coming back, but the other thing affecting us is that companies are trying to get approvals [from their head offices] for capital they need to fit out a new office,” says Carney. “A lot of firms don’t want to spend money while they wait for their share price to come back up. In that regard, the focus is now to renew where you are for a couple of years, or take short-term fitted grey space in the market to get staff back in with a nice new environment.”

However, the severity of any tech downturn may need to be put in perspective, with sentiment possibly resembling a hiatus rather than a true long-term downturn.

“There are more people working in tech now than there were in 2019,” says John Moran, chief executive and head of capital markets for Ireland at JLL. “There is this narrative floating around in the market that everyone has lost their jobs and the whole world is going to collapse – with respect to journalists, a lot of this is media sensationalism.” Fears of a major downturn have also arguably been influenced by headlines emanating from the US itself, which is grappling with a more severe glut of office space in 2023.

Paul Finucane, director at Colliers Ireland, says the local market does not seem to be as gloomy as the global office market. “We’re hearing horror stories from the US and all the rest of it,” he says. “A lot of the big tech fi rms are bringing space back to the market in Dublin and it is high-quality space. It will be interesting to see how that competes with landlord space.”

Tech take-up

One example is Meta’s European head office at Ballsbridge in Dublin 4. Meta signed a 25-year lease in 2018 on the 375,000 sq ft space developed by RGRE. However, in December the tech giant instructed agents to find tenants for four of the newly developed blocks. “If I was a betting man, I’d say Meta will occupy that building within five years,” Moran notes. “Once Meta’s share price corrects, particularly with the expansion of AI, we will see these spaces getting filled again.”

Moran’s outlook on the leasing market is shared by others in the sector. “Office markets all around the world work in cycles, which reflect the lags in oversupply and undersupply. The amplitude of the cycle depends on the extent of oversupply,” says BNP Paribas’s McCartney.

“If we were to go back to the immediate pre-Covid quarter, the vacancy rate was about 5% – now it’s tipping over to 12%. We think it will be around 15% by the end of this year. In Dublin, a vacancy rate of 11% is consistent with a balanced market where rents move sideways, rather than up or down.” Rents in prime central Dublin stand at €60/sq ft to €67/sq ft (£51/sq ft to £58/sq ft), which is similar to the levels commanded in 2018. The fact that rents have held their own despite rising vacancy rates is a curious anomaly of the current market dynamic in Ireland. “There is a two-tier market [in Dublin] where prime rents have decoupled from the vacancy rate at the lower end,” says McCartney.

Changing requirements

The volume and size of deals in Dublin have also changed in the past 12 months. Colliers’ latest market report notes that 55 deals were completed in Q2, with an average size of just under 7,500 sq ft – a far cry from the huge deals signed at the tail end of the last decade. Lease terms have also shortened. This can be partly attributed to increasing activity in the professional services sector, which has a number of major firms looking for new space that typically prefer city centre locations rather than huge purpose-built campuses. Even here, however, some larger requirements are coming to the market.

“A lot of professional services firms are coming to the end of their 25-year leases,” says Carney, who adds that KPMG signed up to 300,000 sq ft of space at Harcourt Square in late 2021 on a pre-let, while Deloitte is looking to negotiate a pre-let at Adelaide Road and EY is looking for 200,000 sq ft of space at present. “They represent three out of the four big accounting firms, and they are looking for a long-term home and are focused on finding best-in-class ESG-focused buildings in prime Dublin locations.”

In terms of future demand, the ESG-led schemes, whether refurbishments or new builds, are most sought after. According to BNP Paribas, older, less sustainable buildings are already commanding “significantly less attainable rents” than newer stock. “We’re certainly seeing a softening in new builds,” says Ronan Phelan, Managing Director of Architecture Practice Scott Tallon Walker Architects.

“We are still working with multinationals on developing larger campuses, but for the one-off city centre office building there is certainly a softening [in the market]. Most of our enquiries are related to renovating and upgrading existing buildings. “There is an opportunity for architects there to add value [to existing buildings]. The focus on adapting and renovating older office buildings is going to be a lot of what we do in the future.”

How the tech turmoil pans out in California remains to be seen. But no matter what happens across the Atlantic, Ireland’s office market has proved to be more than just a one-sector wonder.