Do structural changes in the market mean the Irish boom is here to stay?

The turnaround in Ireland’s commercial property market has been extraordinary, writes John McCartney, director of research at Savills Ireland. At the depth of the economic crisis in 2011, one-fifth of Dublin’s offices were vacant and investors spent just €25m (£22m) on income-producing property assets. By 2018, office take-up had recovered to a record level, vacancies stood at a 20-year low, and €3.72bn of property assets traded. Given the natural cyclicality of property markets, are we seeing the upswing of a regular cycle, or have structural factors led to a step-change in the scale of the market? Sustained low interest rates have driven capital into risk-bearing assets in search of a return. The Irish property market has clearly benefited from this. Initially, with economic recovery still tentative, most of the capital came from US private equity. As transactional evidence accumulated and occupier markets strengthened, the investor pool widened. European capital arrived in 2015, led by German investors and, later, French and Swiss institutions followed. Money is now flowing in from Asia. The period of ultra-low interest rates has now gone, but rates remain low by historical standards, and the pace of monetary tightening has stalled in recent months. Consequently, Ireland’s investment market should enjoy a longer tailwind from the monetary cycle than was anticipated six months ago. The Irish investment market is also benefiting from an upswing in the domestic business cycle. GDP grew by 6.7% in 2018 and employment rose by 2.3% – among the fastest rates of jobs growth in the EU. This is fuelling the occupational demand for commercial space. However, in parallel to these cyclical drivers, something has caused a structural change in Dublin’s economy. Of the 50,500 net additional jobs created in Ireland last year, 15,000 (29.7%) were Dublin office-based roles. While total employment rose by 2.3%, Dublin office-based employment rose by 6.3%. The office market provides insights into what is driving this. Two decades ago there were three main sources of occupational demand: public sector, large domestic banks, and a few professional services firms, such as accountants and solicitors. These organisations were focused on the domestic market and, in a country of fewer than five million people, this limited their scale and business space needs. The old reliables remain important. But tech firms, many of which are US multinationals, accounted for 55% of last year’s office take-up. These businesses are attracted to Dublin by the English language, close historical and cultural ties with the US, low corporation taxes, EU membership, common law, and the youngest demographic in Europe. These factors have contributed to Ireland’s success in attracting investment over many years. But, more recently, three global trends have made them much more powerful. Firstly, technological innovation has led to the emergence of new sectors – and companies – that did not exist 20 years ago. Secondly, the virtual nature of many new technologies has shifted the nexus of global economic growth from physical goods to intangibles. Thirdly, facilitated by technology, the global economy has become more deeply interconnected. The virtualisation of trade has made it possible – and desirable – for multinationals to run their entire EMEA, or even global businesses, from Dublin. Facebook, Google, Salesforce and LinkedIn are among the firms that have located outward-facing operations in the city on a scale that is entirely decoupled from the limitations of Ireland’s internal market. This has led to substantial job creation and office space requirements. With a large share of Dublin office take-up now attributable to tech, it is natural to question whether the city has become over dependent on such occupiers. However, considering the irresistible global forces that have driven this – technological innovation and globalisation – tech companies’ demand for business space in Dublin is unlikely to reverse. So, while Dublin is benefiting from a cyclical upswing, I believe the office market is also going through a fundamental structural shift in demand.