Central Bank warns of oversupply risk to the office market

A million square metres is currently being added in capital

Stock image. Photograph: Getty Images

Donal O'Donovan and Sarah Collins

June 16 2022 02:30 AM

A flood of new offices hitting the market is running well in excess of post-pandemic demand which has been dampened by the big shift to remote working, the Central Bank has warned.

The analysis raises major question marks over whether the market can absorb the new supply. It suggests demand would have to double from the average of about 150,000 square metres of Dublin office space taken up in 2020 and 2021 to match the supply coming onstream between now and 2024.

More than one million square metres of new offices are currently at various stages of development in Dublin alone, half of it due for completion between 2022 and 2024, the analysis said.

Filling that space would require demand to revert to pre-pandemic levels but with more staff working from home and greater willingness among firms to adopt remote working, a degree of uncertainty around future office space requirements has emerged, the Central Bank’s latest half-yearly financial stability report said.

“While there was evidence that the office market was undersupplied prior to the Covid-19 outbreak, given structural changes in how people and companies work in its aftermath, there is higher uncertainty around the capacity of the market to absorb this level of additional space over a relatively short period,” the new report says

The glut of new supply is partly due to a backlog built up by site closures and other pandemic-related disruptions.

The Central Bank analysis does not cite data from other major centres but Cork and Limerick both also have significant volumes of new offices under development planned ahead of the pandemic.

Foreign direct investment is the biggest driver of large scale new office lettings in Dublin and it has held up after the initial phase of the pandemic, but there’s now significant uncertainty about the size of new offices required to host employees.

The biggest office schemes underway in Dublin include Johnny Ronan’s new Facebook campus in Ballsbridge and Salesforce Tower in the IFSC which are both being built to meet demand from individual clients.

The commercial real estate market has already taken a significant hit since the start of the pandemic with weaker rents and asset values as well as higher vacancy rates in both the retail and office segments as a result of lockdowns and an accelerated shift to online shopping during Covid, but that’s been offset by rising demand for logistics parks and residential blocks.