By Conor Lennon, Divisional Director, Offices Department.

As people look around Dublin, they will note the inordinate number of cranes building new offices in the city centre. Given the move towards hybrid working many wonder who is taking these offices, and why aren’t they building badly needed new homes.

In Dublin City Centre there is approximately 2.5m sq. ft of office space under construction, 27% of which is pre-let to tenants.  To put this in context, there is approximately 29.4 million sq ft of office stock already in the city, so what’s under construction will add 8.5% to this.  Developers of speculative schemes without any pre-lets will be somewhat nervous about nailing down the occupation of their new blocks over the next 12-24 months. Previously you could depend on big tech firms acquiring a large chunk of your development, but that demand has diminished for now. However, developers can somewhat breathe a sigh of relief as they will soon be offering a product which will be in high demand; that is A- rated BER office buildings. ESG will be at the forefront for any company acquiring new leases and they will look to lease these new office buildings as their new bases leaving their old buildings behind. Here lies the opportunity.

Vacancy in Dublin has been on an upward trend since the beginning of Covid, having risen from 8% at the end of 2019 to 13.8% in today’s market. This is a significant uplift, but still a manageable percentage. Increases in office vacancy rates are happening around the globe.  To address this, various cities are turning to vacant offices to help solve their own housing shortage issues. For example, in Calgary, the market has a current vacancy rate of about 30%.  To address this issue, the city of Calgary is offering owners of empty office buildings a grant of $75 per sq. ft to convert to residential use, if they meet specified criteria. This programme has seen the city eliminate over 500,000 sq. ft of vacant office space with the goal of eventually reaching 6m sq. ft of space. In Chicago, there is an initiative to convert office buildings in the specific area of La Salle Street where 5m sq. ft of offices sit vacant. The initiative will completely replace the vacant offices with mixed-income housing. Another example is in Wisconsin where recently proposed legislation would, among other things, grant interest-free state loans of up to $1 million to developers trying to convert empty big-box stores and office buildings into affordable housing. The success of the two latter schemes remains to be seen.

A former office block in ParkWest, Dublin, which Harcourt Developments converted to apartments. Photo: Harcourt Developments

Dublin’s office vacancy hasn’t reached the highs of other cities and there is only a certain number of office buildings that sit vacant in their entirety. According to Lisney’s records, there are 19 fully vacant office buildings in the City Centre, 8 of which are newly built and 15 fully vacant buildings in the suburbs 3 of which are newly built. A residential retrofit needs a completely vacant office building, and many landlords/developers will have tough decisions to make in the coming years on how to future-proof offices within their portfolio.  We also know that not all offices suit a conversion to residential use again limiting the number of retrofit opportunities. The suitability of the buildings comes down to many factors including location, amenities, accessibility, structure, core positioning, number of windows, depth of floor plates, ventilation, fireproofing and many more.

Nevertheless, upcoming lease expirations will give opportunities to landlords to empty out their office buildings and carry out one of two options; 1) renovate the entire office building in order to meet the ESG credentials of future occupiers in the market or 2) carry out a full retrofit and change the use of the building. Most owners will focus on the first option as it is seen as a cheaper solution with a potentially higher return. Unless landlords are motivated to consider a residential retrofit by a similar incentive scheme being used in Calgary, most will avoid going down that route. Landlords and developers are in the game to add value to their assets and now is the time to convince building owners to consider residential retrofits as another solution to solving the housing crisis.

Ultimately, Dublin’s vacancy rate is not at the extreme levels experienced in other cities, but opportunities will arise where owners of office buildings will be forced to pay for major works to modernise their buildings. The question is, will they be appropriately persuaded to consider retrofitting for residential use?