Welcome to the 35th edition of CBRE Ireland’s Outlook report, in which we analyse the key dynamics that explain the performance of Irish commercial real estate in 2023 and what matters in 2024. The last year has proved to be very challenging for the real estate sector, as tighter monetary conditions came to bear on market valuations.
However, our report shows that some sectors have been more resilient than others, as long-term demographic trends trump the shorter-term impact of higher interest rates. Financial conditions eased in the final quarter of the year as the pace of inflation continued to decline, pushing down yields in the fixed income and equity markets. A continuation of this trend in 2024 will help support a recovery in real estate later in the year.
Euro Area CPI Close to Target Rate
Euro area CPI is now trending closer to the target 2% annual rate. The baseline scenario in 2024 is for CPI to continue to moderate and stabilise. The prospect of deflation or a rebound in inflation if interest rates fall too quickly have both been raised as possibilities by economic forecasters, however, barring any majorly unforeseen events, the base-case scenario should hold true. We expect a Euro area CPI annual rate of +1.8% by year-end 2024. This will support a more dovish approach to interest rate policy and will be positive for general business investment and for household disposable income.
Interest Rate Policy to Turn Dovish
Having closed the year at 4.50%, its highest point since the early 2000’s, the ECB’s main refinancing rate clearly appears to have peaked. Now, given the trajectory of inflation and the weakness in economic growth across the Euro area, including a technical recession in its largest economy, Germany, rates should decline through 2024. Our expectation is for the main refinancing rate to fall by between 50 and 75 bps in this calendar year. Financial markets and bond yields are now factoring this dovish approach into current market pricing, with expectations varying as to when cuts will be initiated. Declining rates will signal the end of the downturn for most real estate sectors, excluding those experiencing structural shifts in demand. Debt financing will be somewhat more accretive, which should help the Irish investment market enjoy a stronger year.
Wider Spread to Real Estate as Sovereigns Decline
European sovereign yields declined heavily through Q4 2023 on the back of falling CPI and new expectations around interest rates. The Irish 10-year bond yield closed 2023 at 2.4%, having traded as low as 2.2% in December, one of the lowest risk-free rates across the main European economies. This decline widens the spread to prime Irish real estate investment yields, which had closed materially in 2023 when Irish government bond yields reached a peak of 3.4%.
Irish Economy to Expand
Recent Irish economic indicators have been mixed. Headline GDP declines imply that Ireland is still in a technical recession, while modified domestic demand (MDD) has been flat and marginally positive over recent quarters, showing the relative strength of the underlying domestic economy, that still has a record number of people in employment (2.66 million). GDP is forecast to return to positive territory in 2024, with the Central Bank of Ireland forecasting 2.5% growth. MDD is also expected to grow 2.5% in 2024, per the Central Bank of Ireland. Ireland’s employment market remains extremely healthy, with the nominal employment level at an all-time high. Total Irish employment is expected to rise by 1.6% in 2024.
Potential Political Change
Political change on a global and domestic level will hover over markets in 2024. An Irish general election must be called by late March 2025, with the possibility that this could come in 2024. A new coalition government is felt to be the most likely outcome.
This past year has presented some significant challenges and unpredictability for commercial real estate. The continued rapid rise in interest rates impacted property valuations across Europe, with Ireland faring no differently. This broad repricing of assets, coupled with an ongoing structural shift in demand requirements for offices, historically the bedrock of commercial property, brought the real estate asset class sharply into the spotlight. Transactional activity slowed significantly as developers, investors, and operators grappled with the most challenging financing environment in decades.
However, despite some of the noise that these challenges have created, many segments of the Irish market remain on a growth trajectory. Sectors such as hotels, industrial & logistics, residential and healthcare remain undersupplied. And spurred on by strong economic and demographic fundamentals, along with the emergence of an increasing number of attractive, undervalued opportunities that new market conditions have presented, the Irish market has moved on resolutely into 2024.
The continued strive toward more sustainable buildings, the increasing influence of digitalisation in society, and the growing focus on the ‘hotelification’ of certain real estate assets will also be key themes shaping strategies in 2024, presenting opportunities in existing buildings, new development and emerging growth sectors.
Near the bottom of the cycle
Base interest rates appear to have peaked and will decline over the next 12 months, offering some stability to real estate asset pricing. However, valuation corrections have lagged interest rate changes over the last 18 months, and landlords must be cognisant that pricing will continue to adjust in certain sectors in the opening half of 2024.
Funding gap to create more opportunity
Distress and liquidity events, particularly for those leveraged on ‘non-core’ offices, will emerge across Europe in 2024 and beyond. CBRE Research UK estimates a debt funding gap of at least €176bn for real estate loans that will reach maturity between 2024 and 2027 in the main European markets*, with these loans having been originated in a very different interest rate environment. In the last year, the first large real estate receiverships of this downturn started to come through in the Dublin market, and this will continue in 2024. However, it is not anticipated that a wave of liquidations is likely. The combined impact of prudent domestic lending and the fact that Dublin did not experience the same cyclical low yield profile as some of Europe’s major markets mean that there is a prospect that Dublin will be insulated from the worst of the distress.
Investment is now looking more attractive
Investment transactions in Ireland totalled €1.85bn in 2023, the lowest year of spend since 2013. However, private capital has started to identify buying opportunities and is increasingly active as we enter 2024. Given the likelihood of some forced sales in the Irish market, combined with the fact that interest rates have clearly peaked and valuation declines are starting to bottom out, some degree of transactional momentum should return as the year progresses.
Office bifurcation becoming more pronounced
The Dublin office sector will be hugely in focus again in 2024 as more new stock is delivered to the market and the vacancy rate heads towards its highest point since the Global Financial Crisis. However, the key difference in this downturn, versus previous cycles, is that there is a robust level of occupier demand still present in the market. We will continue to see an increasingly distinct bifurcation in Dublin offices. Prime, city centre, sustainable buildings are displaying more resilient demand, while older buildings in non-core locations are facing repurposing and obsolescence in some cases.
Digitalisation influence to increase
The increasing digitalisation of the working world will grow as a key theme in shaping real estate markets globally. The impact of hybrid working on office demand is still playing out, and now the understanding of AI will accelerate, and its adoption will grow. Increased automation, improved productivity and increased demand for digital infrastructure will be the long-term results.
Sustainability & Adaptive reuse
ESG upgrades to buildings, particularly offices, will be increasingly costed into asset values in 2024. Indeed, asset strategy improvement plans are a huge focus entering 2024. Office-toapartment conversions are difficult in practise in Ireland, but other uses such as hotels and medical centres are proving more feasible. More adaptive reuse examples will emerge in 2024.
- The dominant macro-themes in the investment market in 2023 included interest rate increases, debt market volatility and attractive risk-free alternative investments. In 2024, interest rates should tick down, while bond yields have already fallen materially. Debt markets and loan maturities will be key themes in 2024.
- European real estate assets repriced through 2023 as interest rates rose and sentiment softened. Some traditional core sectors, such as industrial & logistics, now appear to have fully repriced, while others, such as offices, have further to go in 2024. Some alternative sectors, such as healthcare and hotels, are also seeing asset valuations start to stabilise.
- A total of €1.85bn of Irish investment trades completed in 2023, the lowest level of spend since 2013. Real estate investment activity will likely be higher in 2024 but deal flow in larger lot sizes will likely continue to struggle. Total volumes should increase year-on-year but will continue to trend well below the 10-year annual average, which is now €4.3bn.
- In 2023, for the first time on record, industrial & logistics (28%) accounted for the largest share of annual spend in Ireland, including the largest transaction of the year, Phase II Mountpark Baldonnell, which sold for c. €225m to Pontegadea. Notable sale processes are ongoing in offices, retail and industrial & logistics as we enter 2024.
- Private capital and family offices were the most active purchasers in 2023, accounting for the top three deals. Private capital will be active again in 2024, while we also expect private equity and opportunistic investors to be on the hunt for undervalued assets. Pockets of institutional capital remain actively looking at opportunities but require market stability and value to execute.
- The Irish population continues to grow rapidly. Net migration in the year to April 2023 was +77,600, the highest level since 2007. This positive migration trend will continue into 2024 and when combined with organic growth, implies that the Irish population is growing towards 5.3m people. This growth will underpin residential demand across tenures in 2024.
- New dwellings completed in the Irish market in 2023 could total up to 34,000 units, the highest annual level of national housing deliveries since the ‘Celtic Tiger’ period. This is boosting rental supply, particularly in Dublin. Residential commencement data in 2023 has been strong, and we expect 2024 new dwelling completions to be at least in line with 2023, with some potential upside.
- Viability issues have challenged the forward-structured PRS investment model that has been hugely prevalent in recent years. Yield expansion, combined with higher financing costs, has made this model unviable. This dynamic is unlikely to change in 2024 and this will push these new developments to State entities. Institutional investors will focus on standing stock investments or social and student housing.
- The residential sector fell to 23% of annual Irish investment spend in 2023, with just over €430m invested. Much of this occurred in Q1, including the largest residential deal of the year, the sale of OPUS at Six Hanover Quay for c. €100m to Pontegadea. There were no residential investment deals involving institutional capital in Q3 or Q4. Overall spend will continue to be relatively low in 2024.
- The ‘State’ is now the most active participant in the market. An estimated 40%-50% of new dwelling completions in 2023 will have a ‘State’ influence i.e. acquired or financed by the Irish government. This trend will continue in 2024 given the political focus on housing in a likely election year. State entities are considerably well-financed to continue to make large acquisitions.
- The Dublin office vacancy rate is at its highest point since 2013 and some districts of the city are now oversupplied. A softer economic and employment market, the slowdown in the technology sector, potential political change in multiple geographies, and the influence of increased remote working and artificial intelligence will continue to be factors in 2024.
- While there has been a general dampening in demand for office space, it is not being felt as much at the super-prime end of the market. Core, city centre, sustainable offices are somewhat insulated from the current softness of the market. Sustainable buildings around Dawson St., Molesworth St. and St. Stephen’s Green will enjoy stronger demand, occupancy and rent levels in 2024 compared to the wider market.
- The Dublin office vacancy rate at the end of 2023 was close to 17%, and this will rise further in the next 12 months as 195k sq m of new stock reaches practical completion, 75% of which is speculative development. Older buildings in non-core locations are becoming increasingly ‘stranded’, seeing much softer demand and are experiencing sharp declines in value. This will become more pronounced in 2024.
- Take-up totalled just over 125k sq m in 2023, c. 50% lower than in a typical year, while it was the first year since 2010 that no leasing deal >7.5k sq m completed in Dublin. Gross take-up will likely be higher year-on-year in 2024, but negative net absorption will continue.
- Rents across the Dublin market came under significant pressure in 2023. and we are now lowering guideline prime Dublin office rents by 4% to €62.50 psf. Secondary rents declined significantly in 2023 05 as landlords became more anxious to do deals. Rents in older, non-core buildings will fall further in 2024.
Industrial & Logistics
- The structural demand drivers that have underpinned demand for Irish industrial and logistics (I&L) property remain in place going into 2024. Dublin and the regional Irish cities are undersupplied of modern distribution and warehousing facilities. Vacancy rates remain at all-time lows while Dublin construction commencements are slowing.
- A broad mix of occupier types have been active in the Dublin leasing market over the last 12 months. Heading into 2024, occupiers in a wide range of sectors have requirements that will likely be fulfilled in the coming months. These include tenants in third-party logistics, manufacturing, biotechnology/pharmaceuticals and a broad range of retailers.
- Take-up in the Dublin market totalled 302k sq m in 2023, largely in line with the long-term average for the market. The largest letting of the year was at Building 2, Greenogue Logistics Park (26,675 sq m), which was let to IKEA’s distribution provider, Wincanton, in Q1. The coming year will see leasing activity continue at a more ‘normalised level’, with limited supply a factor, likely totalling c. 240k-250k sq m.
- Prime Dublin rents rose 13% in 2023, to €140 psm (€13 psf). The supply-demand imbalance in the market is such that rents will continue to rise in 2024, albeit at a more moderate rate. We are forecasting that prime rents will increase by 5.8% to €148 psm (€13.75 psf), which compares favourably to other European markets.
- Investment in the sector in Ireland totalled nearly €520m in 2023, marginally up vs. spend in 2022, but notably, it was the most invested sector in Ireland for the first year on record. Spend was driven by two exceptional transactions at Mountpark Baldonnell and Greenogue Logistics Park, respectively. Yields, both prime and secondary, will continue to be more resilient than the wider Irish CRE market.
- In the 12-months to October 2023, retail sales volumes rose marginally (+0.3%), with retail sales values increasing 3.5%. A slowdown in inflation will help consumer spending in 2024, particularly given Irish household savings are still near at historic highs. Retail sales should be at least as strong in 2024, potentially seeing some modest upside.
- Leasing on Dublin high streets has been moderate in 2023, with Henry St. outperforming Grafton St. in the last 12 months. The most notable deals were New Balance signing a long-term lease at 104 Grafton St. and HMW reopening on Henry St. Several Grafton St. stores have reported exceptional performance in recent months, a notable sign of confidence in the city centre economy for the year ahead.
- Dublin shopping centre leasing and footfall has been strong in the last 12 months. Notable new leases signed at Blanchardstown SC in the last 12 months include Lego, Calvin Klein and Tommy Hilfiger. At Dundrum Town Centre, Dunnes Stores, Jack & Jones and Mango agreed new leases. There is now little vacancy at both centres.
- The performance of ‘out-of-town’ retail real estate has been one of the success stories in European real estate post the pandemic, and Ireland has been no different. The vacancy rate in retail warehouses nationally is just 4.1%* with shopping centre vacancy at just 3.4%*. Demand for units is now outweighing available space in this segment of the Irish retail market, and this will persist in 2024.
- Retail Investment spend in Ireland totalled over €400m in 2023, its highest level since 2019. The largest deal of the year was the ‘Hexagon Portfolio’ of six regional shopping centres acquired by Davy 05 for €74m (NIY 11%). Several large-scale sale processes are ongoing or being prepped as we enter 2024.
- ESG upgrades to buildings, particularly offices, will be increasingly costed into asset values in 2024 and indeed asset strategy improvement plans are the next ‘mega trend’ in global real estate, and one that will be particularly prevalent in Dublin.
- Dublin’s office vacancy rate of close to 17% is raising the question as to whether vacant offices can be repurposed into different uses. While office-to-residential conversions are largely unviable, other uses such as hotels are proving more feasible, while the landlord of a vacant IFSC office recently applied for permission to convert the office into a medical centre. More examples will emerge in 2024.
- Impending EU regulation will act as a catalyst for public sector occupiers to upgrade their office portfolios. This is already evident in Dublin in two large recent leasing deals. The NTA have moved HQ to Haymarket House, D7, while An Post have moved their HQ to the Exo Building in D1. Both buildings are A-rated, energy-efficient buildings
- The Corporate Sustainability Reporting Directive (CSRD) is starting to transform how companies manage, measure and report on sustainability matters. There are varying deadlines for compliance, depending on the type and scale of the company. Large public interest entities are the first to be affected, with the directive coming into force for them from January 2024.
- Sustainability in real estate to date has largely focused on reducing carbon emissions. However, it is becoming commonplace for investors and occupiers to go above these minimum requirements, with many seeking additional certifications such as WELL. Healthier and collaborative working environments, which focus on the well-being of the building’s occupants, will come more into focus in 2024.
- The Irish hotel market continues to benefit from the structural global growth in air travel and tourism, combined with Ireland’s growing multinational employment market. Hotel trading performance has been exceptional in 2023, and it will likely remain strong in 2024. There is some marginal downside risk given how well the market performed in the last year, but at this point, Dublin is undersupplied of hotel rooms.
- A high percentage (estimated at 12%*) of national hotel rooms remain ‘out of the market’, being used as emergency accommodation. This has placed upward pressure on occupancy levels nationally, with Dublin achieving the highest occupancy rate (83%) in Europe in 2023 per STR. This dynamic is unlikely to change in 2024.
- Total transaction volumes for 2023 in the Irish hotel market were €240m, with a further €75m of hotel development site sales. The profile of deals has been smaller in value, but in total, there were 28 individual hotel and development transactions. When considering the number of ongoing, high-value sale processes, hotel transaction volumes will be significantly higher in 2024.
- A total of 1,039 new hotel rooms were delivered in Dublin in 2023, taking total room stock to 26,666. An additional 1,350 rooms are due to be delivered in 2024, with notable openings to include: the 278- bedroom Ruby Molly on Arran Street East and Ireland’s first Hoxton Hotel (125 bedrooms), located on Exchequer Street.
- Yields for prime-leased hotels are now stable, as opposed to the wider real estate market, where asset pricing is largely trending weaker. We expect prime hotels to be sharply in focus in 2024. Yields on VP/trading assets have remained stable despite rate rises, as strong operational performance has offset the impact of higher financing costs.
- Healthcare investment has proven to be one of the more defensive asset classes, displaying counter cyclical and counter-seasonal characteristics and ever-growing demand levels. Investment appetite and long-term demand for all five sub-sectors of healthcare remain strong – Nursing Homes, Primary Care Centres (PCC), Private Hospitals, Residential Care and Senior Living.
- Investment (Nursing Homes & PCCs): Income returns, rather than capital growth, are likely to drive healthcare real estate returns in the year ahead. This means more focus on asset management, and on 02 the financial performance or rent cover of occupiers, as key factors that affect income at the asset level.
- Going Concerns (Nursing Homes, Private Hospitals & Residential Care): The performance of trading healthcare assets in 2023 will continue to be concerned with government funding through Fair Deal rates and weekly care rates, rising costs and reduced multiples compared to the heights of 2020 and 2021. While there is buyer appetite, pricing will be skewed by the high cost of debt and weak equity pools.
- Transaction volumes are likely to be low in 2024, but some activity is likely, both for investments and going concerns. Opportunistic buyers await on the sidelines, for opportunities to be acquired at softer yields than seen in recent years. The healthcare sector benefits from a diverse range of opportunities, all with the backdrop of growing demographic-driven demand levels.
- Development is likely to remain subdued in 2024, with no new schemes likely to break ground. NTPF backed Fair Deal rates, and HSE rents continue to result in weak equilibria between Gross Development Value and development costs.
- Construction material prices moderated in the second half of 2023. The Irish wholesale price index fell from +16.2% at the end of 2022 to just +1.3% at the end of October 2023. A continued moderation in material prices is expected through 2024, meaning developers can now move plans forward with a degree of certainty around building costs.
- A gap between vendor and purchaser price expectations contributed to a slowdown in land transactional activity in 2023. Land sales in traditional commercial sectors were much slower, with a notable absence of any ‘mega sales’. Annual sales totalled just €325m. However, the impending close of a large commercial transaction in Dublin 4, the former Jury’s Inn Ballsbridge site, combined with more stable input and debt costs across the market, means a busier 2024 is in prospect.
- The focus for developers in Ireland continues to be the residential sector, particularly first-time buyer housing and social housing. Residentially zoned sites of scale will continue to be the most sought-after land in 2024, given the housing market remains undersupplied. Land suitable for hotel or PBSA development is also in focus.
- The influence of the State in the market was displayed in the two largest deals of the year. ‘Project Capital North’, 27 acres of residentially zoned land in Clongriffin, sold for €38m in Q4 while 62 acres of residentially zoned lands at Rathbeale Rd., Swords, sold for nearly €30m in Q3. The sites were acquired by the LDA and Fingal County Council respectively.
- Demand for well positioned sites remains strong and the premium for those sites with planning permission became more pronounced in 2023, now standing at between 10%-25%, depending on the project. After the State, the next most active acquirers in 2023 were the traditional Irish homebuilders and this will continue in 2024. Those with an in-house construction arm and a strong balance sheet are well-positioned.
- Home to over 200 multinational firms, Cork continued to attract strong levels of inward FDI in 2023. Qualcomm recently announced a $127m investment in an R&D facility. Earlier in the year, AMD announced the creation of 290 jobs in Dublin and Cork through a €135m investment, while PepsiCo also invested €127m into its Cork plant.
- Given the low vacancy rate and the strong demand present, any new industrial & logistics stock is being quickly absorbed. Demand for modern industrial facilities will continue to grow in 2024 and will likely be further accelerated by the expansion of the Port of Cork in the coming years. The largest Cork industrial deal of 2023 was at Little Island, where Kuehne+Nagel leased 6,900 sq m of new space.
- Office take-up in Cork was slightly below the long-term average. The largest Cork office leasing deal of the year was at Westfield Office Quarter, where the HSE took 6,000 sq m of office space. In the city centre, legal firm RDJ signed a new lease for 1,600 sq m at No. 85 South Mall. Like most markets, office take-up volumes should improve in Cork in 2024.
- Retail leasing activity was strong in 2023, with notable new entrants to the Cork market including Flannels and Mango. Carroll’s Irish Gifts also opened a second store on Patrick’s St. The owner of Intersport Elverys acquired the former Debenhams on Patrick’s Street during the year and is expected to open a sports store in 2024.
- Total investment spend in Cork was just under €190m in 2023, largely driven by two off-market residential sales and the sale of One Westfield, Ballincollig, to Primary Health Properties for €31m. Cork was one of the few markets to see growth in investment spend in 2023, and a number of retail properties in the city centre are on the market entering 2024.