An Empirical Analysis of Development Cycles in the Dublin Office Market 1976-2007

Commercial property has taken centre-stage in recent debates about Ireland's banking system and the health of our economy. However, these debates have been hampered by a lack of empirical research on non-residential real estate. This article sheds light on one key segment of the commercial property sector - the Dublin office market. Using 32 years of annual data, a simple regression model is elaborated which explains office completions. This indicates that office starts react to two key demand signals - rental growth and lettings activity, with completions following after an 18 month construction lag. Reliance on these simple demand signals, combined with a lengthy construction lag, leads to periodic supply overshoots. In turn, this contributes to the boom-bust pattern that has characterised office building in Dublin over many years. We are now entering the "bust" phase of this cycle. Office completions remained strong in 2008 but the Dublin market is now overbuilt. Our model predicts that output will fall by 48 per cent next year and by a further 14 per cent in 2010. All else equal this will deduct 0.5-0.6 per cent directly from GNP and will lead to the loss of approximately 7,500 construction jobs.