Commercial property activity slows dramatically as rate hikes bite 

Estate agent Sherry FitzGerald said investor activity was expected to remain subdued in the short term as interest rate uncertainty persists

Between April and June, there were only 26 transactions closing, bringing turnover to €333m, which is one of the lowest quarterly levels on record.

Commercial property activity has fallen dramatically during the first six months of the year, with capital spending running at less than half of 2022 levels, estate agent Sherry FitzGerald has said.

The company said the deterioration in the market reflects the continued rise in borrowing costs, which is evident in both the volume and value of acquisitions. The European Central Bank has increased rates by 4% since July last year with more increases expected at its meeting later this month.

Between April and June, there were only 26 transactions closing, bringing turnover to €333m, which is one of the lowest quarterly levels on record.

According to Sherry FitzGerald, capital spend reached €985m, less than half that seen for the same period in 2022, and similar to the level recorded during the first half of 2020 as the pandemic hit.

Interest rate uncertainty

Sherry FitzGerald said investor activity was expected to remain subdued in the short term as interest rate uncertainty persists.

Investment activity in the office sector is also likely to be impacted by companies continuing to streamline their space requirements due to more flexible working arrangements.

During the first half of the year, 58% of all commercial property transactions were valued between €1m to €10m. Transactions exceeding €50m accounted for 11% of all commercial transactions which Sherry Fitzgerald said was the “well below levels seen in recent years”.

Almost all of these larger transactions took place during the first three months of the year.

Ross Harris, director of commercial and head of residential investment at Sherry FitzGerald said, given the rising interest rates, “investors' ability to utilise debt and remain competitive in a bidding process has become more constrained”.

He said this would likely result in a higher proportion of transactions completing on an all-equity basis.

Residential properties

Residential properties have been the key driver of investor activity so far this year, accounting for 43% or €427m of total capital spent between January and June.

The retail sector is experiencing an uplift in investor interest, with a further 20% or €199m of capital invested in this asset class. Capital spend in office assets remained relatively weak, equating to €130m, or 13%, of total capital transacted.

Sherry FitzGerald said the demand for residential properties was expected to remain strong during the remainder of the year.

However, rising borrowing costs coupled with above average building and construction cost inflation are likely to continue to dampen forward funds and forward committed investments in the short to medium term.