As we step into 2024, the Irish buildings market finds itself at a crossroads, with both the commercial and residential sectors presenting unique challenges and opportunities. The current state of these markets is heavily influenced by several factors, including the post-COVID economic landscape, increasing interest rates, and changing demands from both investors and occupants. In our recent webinar on The State of the Irish Buildings Market & 2024 Outlook, Annette Hughes, Director of Economic Advisory Services at Ernst & Young (EY), and Bernadine Hogan, Executive Director at CBRE shared their thoughts on these factors and their predictions for the year ahead. We’ve put together some of their key insights below to help prepare you for the year ahead.
Short on time? Here are the main takeaways:
The Irish commercial and residential building markets are both at different phases of cycle. On the one hand, the commercial market is slowing down but we have a very tight supply and a challenging situation in the residential market.
There is a growing demand for high-quality, ESG-compliant (Environment, Social, Governance) sustainable buildings in Ireland. Which is causing stress on the secondary office markets, particularly second-generation buildings, as tenants seek sustainable and collaborative spaces.
Rising interest rates are impacting property markets, causing challenges for investors. The cost of funding has had a significant effect this year, and it is expected to continue into the next year.
The substantial supply-demand gap and rising construction costs are the main challenges facing the residential property sector. There is a pent-up demand of around 200,000 units due to the lack of construction over the past ten years. Construction completions are increasing but the gap is still substantial.
It is expected the challenges in both the commercial and residential markets will persist in 2024. Rising interest rates, debt covenants, and a focus on sustainable and ESG-compliant buildings will continue to influence the market.
Commercial vs. Residential Markets
In our recent blog on the commercial and residential property markets, we discussed the diverging trends that are taking place in both markets. Annette Hughes from EY explained that the markets are both at different phases of cycle. On the one hand, we have a slowdown in the commercial market, but we have a very tight supply and a challenging situation in the residential market. The vacancy rate for residential properties has dropped to an all-time low of 3.9%, while the commercial sector faces its highest vacancy rate on record of 14.1%, signalling an apparent oversupply. Each of these markets are experiencing their set of challenges.
Post-COVID, the commercial sector has witnessed substantial investments in new office developments, with several projects expected to be completed in the next 18 to 24 months. However, there is a growing demand for high-quality, ESG-compliant (Environment, Social, Governance) sustainable buildings. Sustainable and ESG-compliant buildings are highly sought after, reflecting a global trend. This demand is causing stress on the secondary office markets, particularly second-generation buildings, as tenants seek sustainable and collaborative spaces. Moreover, the rise of the work from home phenomenon has caused a decrease in city centre footfall and leading employers to rethink their workspaces to more flexible attractive spaces to retain and attract talent. The other factor that is causing the turbulence in the market is the rising interest rates which is causing challenges for investors. The cost of funding has had a significant effect on the markets this year, and it is expected to continue into next year.
Bernadine from CBRE explained that Dublin is the big catalyst that's driving that vacancy in the office sector. In Dublin, there’s fifty million square foot of office space, and approximately two million square feet of that space is grey space that's available to let on the sublease basis. Which doesn’t include all that vacant space over the shops as well.
While vacancy rates are at all-time high, particularly in the office sector, borrowers and investors are cautiously optimistic about the market according to recent EY research. And Annette believes there’s with no signs of a recession. To overcome the vacancy issue, activation and migration strategies are required by policy makers and the property industry.
Substantial supply-demand gap and rising construction costs are causing the pressure on the residential property market. Bernadine explained that there is a pent-up demand of around 200,000 units due to the lack of construction for over the past ten years. In Dublin alone, there is 13,000 units being built annually but this is still far behind meeting market demand and the gap is still substantial. While thousands of planning permits are approved, many have not started. According to Annette, 48,219 apartments have planning permission granted. With a further 7,500 homes that have been permitted in Dublin in Q 1, 2023, that have not yet begun which is creating a backlog.
The outlook for 2024 will be shaped by ongoing efforts to address these challenges. It is expected that challenges in both the commercial and residential markets will persist over the next 12 months. With rising interest rates, debt covenants, and a focus on sustainable and ESG-compliant buildings these will continue to influence the market. Although it is expected much of the same challenges will persist, several initiatives and opportunities could see an improvement in the market.
Annette explained that there's a huge amount happening to address the housing supply. With many hurdles and barriers, the residential housing shortage is not easy to solve. But there is progress on housing supply, and it’s predicted this will continue to improve next year. There is a growing need to utilise existing commercial and residential property instead of constructing new buildings. This is not only a quicker solution but also reduces carbon emissions. By introducing a National Register for vacant properties this could help reduce vacant properties and better utilise the existing stock.
An opportunity the market is not capitalising on is the over-the-shop initiative. Currently, spaces over shops in towns and cities across Ireland are not utilised for residential units and many are left vacant. While several grants have been introduced to encourage over-the-shop refurbishments, restrictive building controls and high constructive costs may be preventing property owners. Annette outlined how this type of initiative has been successful in other European cities and believes this could be opportunity for Ireland.
The need for town centre revival should also become an important focus in 2024 to improve balanced regional development. The increase in migration and larger cities with better infrastructure, has affected the vibrancy of small towns around the country. Bernadine explained there is a need to implement a strategy with key stakeholders and real estate advisors with government and councils. The government’s Town Centre First policy introduced earlier this year is a step forward in supporting small towns revival. The framework aims to revitalise towns and villages, reducing vacancy and boosting resilience.
With these initiatives and potential opportunities to improve the market, the year ahead promises continued efforts to bridge these gaps and shape the future of the Irish buildings market.
If you would like to watch the on-demand The State of the Irish Buildings Market & 2024 Outlook webinar, you can watch it here.
You can also find out the complete findings from GeoDirectory’s residential and commercial buildings reports here
Posted: 09/11/2023 11:16:38