There are 119 buildings on Grafton Street, most of which are owned by monied Irish families, pension funds and institutional landlords. It is Dublin’s most famous shopping street, and, according to Cushman & Wakefield, the seventeenth most expensive “main street” in the world to rent on. The worldwide list was topped by the Via Monte Napoleone in Milan, which overtook New York’s Fifth Avenue to claim the top spot. London’s Bond Street came third. 

Grafton Street has been slipping down the list in recent years, with the pace of inflation greater in other cities. Cushman & Wakefield said there was an annual growth rate of zero per cent last year on Grafton Street with rents estimated to be an average of $310 per sq ft or €3,024 per sq m per year.

It has always been notoriously tricky to know how much tenants pay for their locations, and in recent years, as the retail market became more sluggish, just what was happening as they recut their rental deals. Estate agents like to accentuate the positives, and while we knew some tenants were getting reductions, it was unclear at what scale. 

The ongoing Bewley’s Cafe rental dispute has shed some illumination, however. The Circuit Court ruled last month that the cafe should have to pay a rent of more than €738,000 per year to its landlord, a company controlled by the developer Johnny Ronan. This represented a 50 per cent drop in the €1.46 million that was originally being paid. The decision is being appealed, as Jonathan and Francesca reported last week.

However, as part of the dispute, new figures were revealed showing the scale of rent reductions obtained by other retailers on the street. 

Victoria’s Secret has a 29,000 square feet premises opposite Bewley’s. A January 2022 review saw its rent drop from €1.8 million to €1.5 million. 

Skechers, the shoe retailer that operates from 13/14 Grafton Street, saw a reduction from €1,680,000 to €695,875 average rent over ten years or €629,250 average rent over five years when it came to open market in July 2022.

Abrakebabra, located at 4/5 Grafton Street saw its rent reduced from €250,000 to €182,000, while nearby McDonald’s saw annual rent fall from €775,000 to €650,000.

&Other, the fashion retailer at 26/27 Grafton Street, was paying €925,000 a year. In 2021, the rent was reduced to €725,000.

None are on a scale close to the proposed rent reductions at Bewley’s, and there are different factors behind each of the reductions. Combined, however, it paints a picture of a downward property market. 

The retail environment is worse outside of the main thoroughfare. CBRE estimates the slump in prime shopping centre values in the past two years has pushed rental yields of shopping centres near the M50 up 30 per cent, from 6.5 per cent to 8.5 per cent. This implies a 27 per cent valuation decline if we ignore rental growth.

And retail property is performing more strongly than the rest of the commercial property sector. 

Just a few hundred yards from Grafton Street is Camden Yard, one of the largest commercial developments in Dublin. Work on the €475 million mixed-used project at the former DIT campus on Kevin Street halted in recent months, as the developer attempted to raise fresh finance. Receivers are now waiting in the wings, ready to take possession of the development if the promoters cannot agree on a deal with the lender.  

This is an extreme example, and the actual number of foreclosures remains low. However, commercial real estate prices have now fallen more than 20 per cent in Ireland since the pandemic, according to the Central Bank.

The Central Bank delved further into the commercial real estate sector in its Financial Stability Review, published last week and assessed by Niall. 

On a headline level, the bank said the commercial real estate market was adjusting to higher borrowing costs and weak demand, two factors that had pushed down prices. 

It noted that in recent months there had been “signs of stabilisation”, but it added that the “full scale of the shock is still uncertain and conditions could deteriorate quickly”.

It was particularly concerned about the office market in Dublin, which it said “remains uncertain as the vacancy rate continues to rise, despite some pick-up in take-up activity”.

In the eyes of the Central Bank, the pandemic changed the structure of the office market, with many employers still deciding their “steady state” need for office space. Essentially they are hedging their bets, and not committing to long-term letting agreements.  

It means commercial real estate borrowers “are vulnerable”, particularly when it comes to refinancing “existing loans” in a high interest rate environment.

Interestingly, the data points to increased letting activity during the second and third quarters of the year. This was being driven by professional and financial services firms and the public sector in particular. 

All told the uptick means the level of Dublin office space taken in the first nine months of the year outstrips the total for the entirety of 2023.

However, there is also evidence that landlords are showing a greater willingness “to offer inducements” to tenants, such as rent-free periods, as an alternative to cutting headline rents. The Central Bank says this points to an underlying imbalance between supply and demand.

I know of one major retail development offering two-year free rent deals to anchor tenants. It allows the landlord to get a tenant while not reducing the headline rent. But it adds nothing to the top line.

I know of multiple retailers that made bids on vacant retail outlets but were rebuffed because they were unwilling to meet the asking price. However, the “pretend and extend” tactics will only last for so long, particularly in the office market, where the Central Bank says that the rise in letting deals was outflanked by the amount of new office supply that came on stream. 

It means that, despite the increase in lettings, the amount of vacant office space has increased to well over 18 per cent. 

This may ease somewhat, however, with fewer office projects coming to the market in the years ahead. 

Overall, the total investment expenditure in the domestic commercial real estate market during the first three quarters of 2024 came to €1.3 billion. This was a similar figure to that in the same period in 2023 but, to put it into a broader context, it was about half of the average spend in the equivalent quarters between 2015 and 2022. 

However, there are some signs that the recent lull in investment activity may be starting to bottom out. 

According to the Central Bank, the €600 million invested in the third quarter of this year meant it was the busiest quarter since the first three months of 2023 and the fourth busiest third quarter of the past decade. 

Thankfully, the regulator is not worried about the impact of the property market on the domestic banking system, believing it has the capacity to absorb rather than amplify, the current commercial real estate downturn. 

“In addition, new sources of global CRE funding, which were not a feature of the Irish CRE landscape prior to the last decade or so, have served to mitigate risks to financial stability through increased international risk-sharing and diversification,” it says.

The banks are well-placed, and well-insulated, to deal with a further fall in valuations. But that does not mean that a further decline in valuations will not impact investors. But, as we have seen on Grafton Street, the strain on the market might help tenants secure rental reductions. 

Elsewhere last week…

Fianna Fáil and Fine Gael are set to begin the business of forming a government. Last week, I teased through their manifestos to see the similarities and differences in the fiscal pledges. After all, a key clash between the parties during the campaign centred on manifesto costings. But when stripped back, the data shows striking similarities in how much they plan to spend and where it will be allocated. It seems that agreeing on a Programme for Government won’t be that tricky.

In his column, Dan looked at why inflation had such a limited impact on the Irish election given it has been the key issue in a host of other countries. He also argued the cause for Ireland to increase its spending on defence and security. 

Joe revealed An Garda Síochána has paid hundreds of thousands of euro to an Israeli cyber defence company that has worked with Israeli authorities to crack thousands of Palestinian phones seized by the Israeli Defense Forces since the beginning of its invasion of Gaza. The company, Cellebrite, has deep links to Israel’s military and intelligence apparatus and has previously been criticised by rights groups for selling its technology to repressive governments including Russia and China.

From the RTÉ Guide to food packaging for Musgraves, Drogheda-based Boylan Printing has an enviable client list. But Covid-era debt and soaring energy costs have left it millions in the red. Francesca had the details.

Exergyn’s groundbreaking tech could help stop global warming. An investor is now backing its plan at a €200 million-plus valuation. Meanwhile, Realta Fusion, led by Wexford-born Kieran Furlong, is on track to launch a prototype fusion energy generator by 2030. It has just received funding from a venture firm backed by the Green Bay Packers and Microsoft. Tom had both stories.