Our Chief Executive, Niall Gaffney speaking to The Currency

Our Chief Executive, Niall Gaffney recently spoke to Seán Keyes from The Currency

The Currency | We’re all working from home two days per week – but office landlord IPUT Real Estate Dublin is still betting big on the city centre. ?

It is a nervous moment for the commercial property industry. But rents and yields are still holding up. Niall Gaffney, CEO of Ireland’s largest office landlord IPUT, is optimistic about the future of the office, and of the city.

Few companies have more at stake in the future of Dublin city centre than IPUT. The Irish Property Unit Trust, founded in 1967, is the biggest owner of office buildings in Dublin. It owns 92 commercial properties, 91 of which are in Dublin.

It owns or partially owns some 40 offices in Dublin, including trophy properties at Wilton Place, Molesworth Street and Sir John Rogerson’s Quay. It also owns seven properties on Grafton Street and three on Henry Street. Its offices are worth €2.2 billion, some 70 per cent of its total assets. It also owns €434 million worth of retail units and €410 million worth of warehouses. In addition, few have as much to lose from changing work patterns. However, there is a disconnect between Dublin's commercial real estate industry and the reality of office life in 2022. On the one hand, the office market is recovering nicely from the pandemic. Yields — which show how investors convert rents into the price of buildings, and therefore how confident they are about the future — have stayed steady since 2017, at 4 per cent.

Prime Dublin City office rents fell 11 per cent from their pre-pandemic level to a low point in the first quarter of 2021. They have steadily recovered since then, and are now down four per cent from their pre-pandemic level. The third big number for commercial real estate investors is vacancies. On this score, Dublin does a bit worse. According to CBRE, a consultancy, prime Dublin office vacancies are holding steady at 8.3 per cent. Savills, a property agent, said the European average was 7.2 per cent in the first quarter of the year. And according to Savills, Dublin had the joint fourth-highest vacancy rate of 23 office markets it surveyed in the first quarter of 2022.

Companies are taking up plenty of new space. Some 46,000 square metres of prime office space were taken up in the second quarter, which is equivalent to the amount taken out in the same period in 2019. And last week, IPUT announced TikTok had taken out a long lease on the entire 7,900-metre Tropical Fruit Warehouse building. It may be three, four days a week, but it will happen and will happen in the workplace.

Niall Gaffney "It's been a roller coaster ride between the previous two years in a pandemic, coming into the current economic backdrop," said IPUT's CEO Niall Gaffney. "We've had really positive numbers in the Irish economy: growing population, the youngest populations in Europe, great numbers from the IDA in the first half of the year, strong FDI. So there's been a lot of positive macroeconomic and high-level outcomes for the country and indeed the city that we're looking to deliver commercial real estate."

The disconnect - The disconnect is between the relatively strong market for prime office space, and the mounting evidence that five-day working weeks are a thing of the past. Surely, something has got to give??

"Are we seeing a net decrease in demand for office space? Not yet. Are we worried about the office market? We'd be challenged by some of the changing factors that have been brought to bear. Office space that was built 15-20 years ago, to accommodate changing work practices. We've been doing that," Gaffney said.?

"We're also seeing the reaction of Google and more recently, Apple, who are saying, 'Look, this is a collaborative business. This is a highly productive business. We need people in the office in the workplace, at least three days a week.' So I think that's a strong awareness of what's going to happen. ?

"I think, what we've seen today has been a hiatus between governments, between large employers who have been sitting on the fence, frankly, in relation to their HR policies around this. And we're starting to see productivity be hit being hit in the large multinationals."

Does this matter to the rest of the country? "We just need to we need to remind ourselves what made Dublin successful, what makes this country successful. It's been largely down to the IDA selling, Dublin as a place of innovation, people who are flexible in their approach to work. And who generally work, in the Anglo-American style, which is, 'we get things done. We're very productive'," he said.

"Multinationals setting up here, particularly in the FinTech industry, they're bringing people to effectively what they would see as a boot camp. It's where you get trained up in the EMEA HQ. You don't bring people to Dublin to work from an apartment, or to work from home. You bring them to Dublin so they learn, they grow, they evolve, they innovate, they add value.”?

The economist Nicholas Bloom and his colleagues have been collecting data on working from home in the US. Every month, they have surveyed tens of thousands of workers to learn about their work habits. ?

The big picture is that they've found working from home is not going anywhere. Working from home spiked during lockdowns, but has settled back at a level six times higher than before the pandemic. A surprising finding is that employers are coming around to working from home. The following chart shows how many days per week employers and employees would like to spend workers to spend at home. The number for employees has stayed fairly stable, at 2.8 working from home days per week. But employers' views on the right amount of working from home have evolved, and increased, over the last two years. There are caveats: desire to work from home is more concentrated in big cities than small ones. The survey found in the ten biggest US cities, 37 per cent of working days were worked from home, and in the smallest cities that number dropped to 27 per cent. In big but not huge American cities — the category Dublin would belong to — 29 per cent of days were worked at home.

Bloom et al's data are from the US. What about Ireland? Here, Google trends data shows that office demand in Dublin is down by 40 per cent. And, as Ronan Lyons has written in the Currency, house prices have risen much faster in outer Leinster counties — the ones commutable to Dublin two or three days per week — than in Dublin city, or the rest of the country.

How does Gaffney reconcile the strength in the Dublin office market, with the data showing strong demand for permanent working from home?

"The idea that the workplace becomes a place where there's no people, or very little people, is, I think, anathema to how human beings work. Human beings are social animals," he said.

?"If you are established in your career and have a certain age profile with a certain client base, happy to deal with you on a one-to-one basis, whether that be remotely or in person, then you're very fortunate.?

"But if you're at a stage in your career when you're starting out or you're halfway through your career, you need to learn from senior people. And those senior people need to be in the workplace in order to progress in life. The idea that you join a training programme and some of the top four accountancy firms, and in the last 24 months you've yet to meet somebody, or you've yet to meet the senior partners. You're meant to learn from then, how do you move your career forward?"?

The public realm - IPUT's big bet is that face-to-face collaboration is still important, that offices and cities are still important. So it has built its newest offices around collaboration.?

"The flip side of that is that for people to come to the office, in that type of environment, they need more collaborative space, they need more breakout space, conference halls, meeting rooms. And what we're seeing in office design from some of the occupiers fitting out in the last six to 12 months, is a greater volume of space given over to collaborative working. They also need theatre style, or mini theatre style seating."?

"But the fundamental benefits of having a workplace that's vibrant, stimulating and ticks all the boxes in terms of sustainability – the variety we're producing, like a tropical fruit warehouse – will prove to be attractive places for major occupiers to base themselves in to create a culture of innovation, and to grow and be productive. That's the nature of work. That's the nature of human interaction.?

IPUT stresses placemaking: public spaces in and around IPUT buildings where people come to relax and chat and enjoy themselves. It spends a lot of money on paving, parks and benches.?

IPUT's bet on offices as collaboration hubs needs the city to play its part, too. To entice workers from their homes, Dublin needs to be easy to travel around, with affordable homes and a safe pleasant public realm. Is Dublin delivering its end of the bargain??

"I think they've made great strides from where they were, I think they're working hard to improve the city. I think having that integrated approach across all services –when you're dealing with roads, when you're dealing with public lighting, and these various departments might not be talking to each other. We found challenges with that where we would have a vision for particular development, and we have to talk to multiple departments in the city to try and get that."?

What needs to change? "It would be nicer if that was more integrated. It was tied together into neighbourhoods, and reflected in a more integrated way… a more integrated placemaking strategy for the city do a limited number of things, the paving, the public furniture, the public planting, where the strategy around those are uniformity."?

For career progression in the longer term, and for innovation and culture to work, workplaces are where it's going to be at.?

The problems, said Gaffney, go beyond local government: "I wonder what Lemass would think of it. The inability to have a vision and follow through in a determined fashion, rather than constantly looking over your shoulder in terms of policy, is what frustrates us. It's very frustrating," he said.?

On housing, Gaffney cuts the government some slack: "You have the challenge with rented accommodation, all of these cities, it's a phenomenon we're seeing across the world."?

Office REITs are having a tough time. The S&P Office REIT Index is down 31 per cent from its level at the beginning of 2020, which is about where it ended up after the first crash in April of that year.

IPUT has an advantage over the office REITs: it's not publicly traded. Where REITs get valued every minute of the trading day, IPUT assets get valued once per year by professional valuers. Are the two fundamentally different "The listed sector reflects sentiment. The sentiment right now is uncertain. As you look at the office market for the investment markets, for the next six months be that real estate or investment generally, it is quite unclear. Look at the future of the office, and it's shrouded in mist."

END.