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Commercial Activity Plunges, But That Could Be Good News For Landlords

A steep decline in commercial real estate development could prove to be a welcome relief for landlords.

A sharp slowdown in commercial activity has dragged construction to its lowest level this year, according to BNP Paribas Real Estate Ireland's Construction Total Activity Index.

Ongoing demand weakness continued to pose challenges to companies within the Irish construction sector and drove sharper downturns in activity and new orders in August with purchasing scaled back, according to the report.

However, despite the gloomy prognosis, the report added that a slowdown in activity could be good news for those with vacant commercial real estate.

Cost pressures mounted further, with input price inflation hitting a four-month high, and the headline seasonally adjusted index registered below 50 during August to signal a back-to-back reduction in activity in Irish construction.

A figure above 50 for the index shows growth, and below 50 indicates a retraction in activity.

Posting 44.9, down from 45.6 in July, the latest headline figure was indicative of a marked rate of decline that was the most pronounced in the year so far and was evident across all three categories, BNP Paribas added.

The reduction in commercial activity was the sharpest in almost 2.5 years, with panel members highlighting deteriorating demand conditions linked to interest rate hikes and inflation.

Irish construction firms responded to subdued order books by reducing their buying activity for a third consecutive month in August, albeit easing slightly from the previous survey period.

However, Irish construction firms continued to express optimism in the year-ahead outlook. The main factors underpinning the positive assessment included hopes for an improvement in market demand, the launching of new product lines and the commencement of new projects.

“The August PMI is a blend of emerging and ongoing dynamics,” BNP Paribas Real Estate Ireland Director and Head of Research John McCartney said in a statement. “The most notable new trend is a very pronounced decline in commercial building activity in July and August, bucking the trend of consistent expansion over the first half of 2023. 

“This is a welcome development as it limits the potential for oversupply in areas of commercial property, such as offices, where vacancy rates have been rising.” 

He also pointed to the reacceleration of input cost inflation in July and August after nearly two years of receding cost pressures.

“This jars somewhat with the latest CSO data on building materials and labour costs, but could be an early sign that re-emerging energy price increases since June are beginning to impact the sector,” McCartney said.