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Could Nasdaq's Tech Bears Slay Dublin's Office Market?

The U.S. Nasdaq index has fallen 20% this year.

They say that when the U.S. economy sneezes the rest of the world catches a cold. But when it comes to U.S tech giants, can a Nasdaq crash cause more than a shiver in the Dublin office market?

Dublin is more reliant on tech occupiers than almost any other market in Europe, so a big hit to valuations and stock prices of tech companies, with accompanying layoffs, as is now being seen around the world, has the potential to slow the leasing market down, just as a big chunk of new space is coming online. 

The Nasdaq has had a bumpy ride thus far in 2022. On 28 June the index tumbled by 3% with big tech stocks such as Amazon and Tesla both falling. So far in 2022, it has fallen almost 25% while the S&P 500 is down around 16%. In terms of stocks, the U.S. tech sector is firmly in a bear market.  

Ireland was the No. 1 international choice for U.S. tech companies in 2021, analysis from Ireland’s Central Statistics Office found. Overall inward investment into Ireland topped €1T for the first time in 2019, with U.S. firms accounting for over €700B of that figure.

Nine of the world’s top 10 global software companies are present in Ireland, as are nine of the top 10 U.S. tech companies. The tech love affair began with IBM, which opened its first office in 1956, with HP following suit in the 1970s.

In the past two decades Google, Amazon, Aon, Facebook, Mastercard, Salesforce and Asian tech giant TikTok have opened bases in Dublin, taking millions of square feet, and fuelling the post-GFC recovery of the property market. Tech firms have accounted for 48% of Dublin office leasing over the last five years.

"A pull-back in the Nasdaq can result in tech companies’ Dublin office requirements being put on hold, at least temporarily," BNP Paribas Real Estate Ireland Director and Head Of Research John McCartney said. "But these requirements often get reactivated again quite quickly." 

McCartney noted that U.S. tech firms have continued to advance on leases, at least for now. Other analysts have taken a different, more bullish view. 

“We have seen a number of deals complete in Q2 involving large U.S. tech firms, notably at 60 Dawson Street and at the Dock Line scheme on Mayor Street," CBRE Ireland Associate Director Colin Richardson said. "Alongside this, we have seen continued FDI-related job announcements in the opening half of the year, including from some U.S. technology companies.  

"As such, while undoubtedly we will continue to monitor events in U.S. markets, the impact has not yet translated into a material change in leasing activity in the Dublin market”. 

Peaks and Troughs

What could a stock market bear run mean in terms of rents? Prior to the dot-com crash in 1999 Dublin office rents rose at an annual rate of 33%. However, rents fell back by 9.1% in the subsequent two years. 

The stock market woes of the United States could possibly feed into other factors already beginning to affect the Dublin office market in 2022. The most pertinent of these is a glut of new space. 

According to BNP Paribas’ McCartney, the Dublin office market has arguably split into two distinct tiers. New high-spec office developments are commanding higher rents, and older stock is seeing less interest. 

“Occupier demand is particularly focused on modern, sustainable buildings,” McCartney said.

“As such most of the new buildings that are coming on-stream are being let prior to, or relatively quickly after, practical completion. As these buildings are relatively scarce, rents for the best modern stock are continuing to increase."

However, the uptick in overall vacancy will be felt in the older stock, and this could dampen rents for older and tired buildings, he said.

The issue of older stock having lower headline rents is nothing unique; however, the distinction that makes Dublin different from other cities is the gap between the rents that the two different office tiers can command. 

There is also vacancy glut that is making its way through the market in 2022.

The Central Bank of Ireland’s financial stability review 2022 found that there has been an “uneven recovery” in the Irish commercial property sector, with the office sector remaining “vulnerable to both cyclical and structural vulnerabilities as a result of the Covid-19 shock”.

The report, which uses data up to May 2022, found that there is currently 10.7M SF of office space at various stages of supply, half of which is already under construction. The central bank also stated that more than 2M SF is due to complete this year and “lettings of over [3.2M SF] would be required this year to absorb this volume of space”.

In those terms, take-up in the Irish office market would need to return to pre-pandemic levels. The average annual office take-up for the past two years has been only 1.6M SF.

The Central Bank notes that “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”.

Tech crash or not, the vacancy in the Dublin office market currently stands at 10.5%. This is likely to see an uptick as 2022 continues, reaching 11% by the year’s end. 

“Considering everything I think around [2.4M SF] of take-up is achievable in the Dublin market this year,” McCartney said. “This will not be sufficient to absorb a net increase in the office stock of around [2.6M SF] due to new space deliveries.”