Commercial property specialists CBRE today released their comprehensive Outlook 2023 annual report containing their predictions for each sector of the Irish property market in the year ahead. The property consultants say that Ireland’s property market performed better than expected in 2022, despite the impact of rising inflation, interest rate increases and a slowing European economy.
While trading momentum slowed in the second half of the year, several high-profile investment transactions completed over the last 12 months including: the Hibernia REIT portfolio, the Salesforce office HQ, and the Valley Healthcare portfolio. The industrial and logistics sector continues to show strong momentum, with take-up remaining elevated and prime rents continuing to grow. Office leasing volumes increased year-on-year, albeit activity still remains below pre-pandemic levels and the long-term market average. Retail leasing activity has turned a corner and the vacancy rate on Grafton Street is now down to just 6 units, with this expected to fall further in 2023.
CBRE outline some of their predictions for the key sectors below and expand on these issues in the report. Overall, the expectation is for the Irish economy and real estate market to show continued resilience in 2023 with another busy year of transaction and development activity in store, despite macro-economic headwinds.
Speaking at the launch of the 34th edition of their annual Outlook report, Myles Clarke, Managing Director at CBRE Ireland said, “While we will likely face some headwinds in 2023, the underlying long-term constructive outlook for the Irish economy continues to attract occupiers and investors from around the globe. Our growing population, its youthful profile, and our continued success in attracting overseas foreign direct investment are all factors which reinforce the need for an ever-expanding built environment. While the market is now adjusting to higher funding rates, and this transition period can be challenging to navigate, we have continued to see deals transact, which is a healthy sign of the market’s resilience”.
Commenting on the report, Colin Richardson, Director & Head of Research at CBRE said, “The year that passed was one of change in the real estate environment globally. Geopolitical events, inflationary pressures and interest rate movements impacted investment and to a lesser extent leasing volumes, while also challenging the activities of developers and real estate operators. Occupiers in offices, retail and logistics continued to adjust to structural shifts accelerated by the pandemic or influenced by sustainability factors. However, the Irish economy and real estate market has proved remarkably resilient, with some key sectors performing exceptionally well. The opening half of 2023 will continue to be influenced by these macroeconomic factors and this will present some challenges and some opportunities. We will likely see some weakness come through in Irish economic and real estate data points; however, the initial market ‘shock’ associated with the aforementioned factors has now passed, and we could see real estate investment activity levels rebound stronger and faster than many anticipate, while the occupational markets and operational real estate will continue to prove resilient. Sustainability will continue to grow as a factor influencing investor, occupier, and developer decision-making, while real estate that does not match environmental goals will become increasingly marginalised in the year ahead”.
A link to the virtual presentation is here: https://cbre.qumucloud.com/view/ZowZZVNBBcxGzTYoQiKZWB
- According to CBRE Research, the Irish investment market recorded a healthy €6.0 billion of transactions in 2022. This was a 9% rise in volumes year-on-year and the second strongest year on record.
- Residential (33%) and offices (26%) were again the two most invested sectors in 2022, while healthcare (10%) accounted for more spend than ever before.
- Investment activity will be slower through the early part of 2023, however when there is more defined stability in relation to interest rates and the cost of capital, we will see a return to more normal trading conditions and asset price stabilisation.
- Not all investors will wait on the side-lines however, as the current market dynamics may present an ideal buying opportunity for many.
- Different investment strategies will come to the fore in the Irish market in 2023. These will include a greater focus on value-add and asset management approaches, with income playing a bigger role in driving returns.
- Real estate yields and asset pricing will continue to recalibrate through the first half of the year.
- Some of our favoured sectors include defensive assets such as healthcare and supermarkets alongside the logistics and residential sectors. Prime offices, let to blue chip tenants, and value-add opportunities for secondary offices will continue to be sought after.
- Occupancy and rental growth trends in the multifamily market accelerated through 2022, as more tenants returned to cities in the aftermath of the pandemic. The number of units available to rent in Dublin fell to historic lows, and in response, rental levels for new multifamily stock continued to trend higher.
- The market did benefit from increased new dwelling completions in Q2 and Q3. Much of this new stock consisted of Dublin apartments, which were delivered with the support of institutional capital. However, the total level of new supply delivered in Ireland again failed to meet the required rate. The cumulative undersupply of residential stock across all tenures persists and is unlikely to be rectified in the near or medium-term.
- A total of €2.0bn was invested in the residential sector in Ireland in 2022 with 70+% of this capital focused on multifamily housing stock in the Dublin region, with the remaining balance focused on PBSA and social housing investment.
- As challenges emerged in investment and financing markets as the year progressed, a number of multifamily sale processes stalled or were ultimately withdrawn. However, encouragingly, despite a slowdown in transactional activity in the broader market, several forward-structured transactions completed in both Q3 and Q4, reflecting the appetite for institutional investors to deploy into Dublin’s massively undersupplied market, despite headwinds
- Viability of new apartment development is a key concern as we enter 2023. Residential commencements started to slow in the latter part of 2022 as construction and financing costs increased and exit pricing declined. These factors will impact new dwelling completion numbers over the medium-term, with smaller developers likely to find it difficult to deliver new stock. It is likely that new supply in 2023 should reach similar levels to 2022, as projects that are currently under construction carry over from 2022.
- Hybrid working and the associated impact remains one of the most pertinent questions in global real estate markets as we enter 2023.
- Several challenges are facing the Dublin market at present including:
- The implementation of the hybrid model and its impact on the long-term demand for the office space.
- The slowdown in the technology sector globally, albeit still small in the context of the overall Irish employment market.
- And the impact of the growing sustainability requirement of occupiers and landlords and the threat that poses to secondary office stock albeit this will present opportunities for developers and investors in the form of brown to green refurbs which will increase in prevalence this year.
- Dublin office leasing totalled 234,000sqm in 2022, a 50% increase year-on-year albeit slightly below the 10-year annual average.
- Prime rents rebounded, and now stand at €65 per square foot for best-in-class product with the requisite sustainability credentials.
- Looking into 2023, there are several fluid sub-plots that will play out around the Dublin office market: two factors are particularly important, how occupiers continue to adjust to flexible working arrangements and the potential for a slowdown in the labour market.
- Take-up will continue to trend below the long-term average and net absorption trends in Dublin will change, with a greater focus on relocation versus expansion.
- We expect professional services and public sector clients to see more value in the market and drive take-up in the year ahead. Prime yields will continue to move out, to at least 4.5%.
Industrial & Logistics
- The Dublin Industrial & Logistics (I&L) market enjoyed a year of records and firsts in 2022. Take-up in Q1 reached a record amount for an opening quarter and the market subsequently enjoyed its strongest ever quarter in Q3. Overall take-up volumes reached 392,000 sq. m. for the full year, marginally below the market’s strongest ever year in 2015.
- A new record price per sq. ft. for a vacant possession sale was achieved during the year and we saw the pre-letting of Ireland’s first net-zero carbon logistics building, constructed using glue-laminated timber-frames at Quantum Logistics Park in Dublin 11, which is due to reach practical completion in 2023.
- Deal activity was characterised by large, pre-let transactions in growing logistics parks, with global 3PL’s, retailers and shipping companies among those active tenants competing for new, modern, sustainable stock.
- Yield expansion was a factor in 2022, Irish assets did not suffer the same price declines as was experienced in some other European markets where yields had contracted to much lower rates.
- Demand for Dublin stock is at record levels, driven by the continued growth of e-commerce and the impact of Brexit
- Indeed, the Dublin I&L market remains fundamentally undersupplied of modern logistics space with the vacancy rate now at 1.3%.
- Rents will continue to grow due to both supply-side, i.e., Input cost inflation for constructing units and on the demand-side where a lack of availability will drive competitive tension for tenants
- Prime high streets and shopping centres enjoyed strong growth in sales and footfall in 2022, as the market benefited from a deluge of pent-up consumer demand.
- The full re-opening of retail across Europe and the freedom for parties to travel helped to spark renewed interest in retail leasing opportunities and we saw a number of exciting new brands enter the Dublin market.
- As a result of the pandemic, Dublin’s prominent retailers are now leaner operations, with the strongest performers well-positioned heading into 2023. Ireland’s household savings ratio remains above pre-pandemic levels, according to the Central Statistics Office, and this will act as a positive catalyst for spending heading into the new year.
- Experiential retail and omnichannel strategies continue to underpin retail business models of the future, while retail investment pricing could indeed be more resilient than other sectors of the commercial property market in the year ahead
- The year 2022 showcased the Irish hotel market’s strong recovery and continued resilience to global macroeconomic headwinds. Intense occupier demand was driven by both the return of tourism and business travel following the pandemic and increased demand for emergency accommodation.
- Rising input costs, particularly in the form of energy prices and wage inflation, remain a significant concern for occupiers as we move into 2023. 4- and 5-star hotels have little room to manoeuvre in the short-term to adapt their offerings to these changes, while budget hotels may prove to have more flexibility.
- On the demand side, recessions internationally risk dampening visitor numbers, while on the supply-side, in addition to very limited construction activity in the sector, there are concerns that many of the hotels brought into the emergency accommodation system are unlikely to return to use in the ordinary hotels market, further reducing supply.
- Despite these concerns, 2023 will see more new faces among occupiers and investors who continue to be attracted by Ireland’s strong underlying fundamentals. Ongoing pedestrianisation plans in Dublin are making the city a more attractive destination for tourists, while several major events hosted in Dublin will bolster demand in 2023.