In the latter half of the last decade as the Irish economy began to show signs of turning the corner from the great financial crisis, bargain-hunting international property investors went on the prowl for value in a market that had been the epicentre of the Europe-wide crash.
The result was that a glut of high-profile properties in Dublin city centre changed hands, chief among them the former Clerys Department store on O’Connell Street and the former headquarters of the Central Bank of Ireland on Dame Street.
In 2023, these two large-scale projects are again generating headlines in a commercial market buffeted by fresh headwinds.
Earlier this week, US co-working company WeWork filed for bankruptcy in the US, heightening anxieties about its anchor tenancy in Central Plaza, the Hines and Peterson Group-delivered scheme in the former bank building.
Beset by construction delays, the group of investors behind the Clerys Quarter redevelopment, meanwhile, have wound up in the High Court with Flannels, one of its two retail anchor tenants, attempting to hold the Mike Ashley-owned brand to its lease agreement.
Dublin is a different city than it was when these buildings were initially snapped up. In the past few years alone, the pandemic, the rise of hybrid working and the cost-of-living crisis – which has forced most of us to rein in spending on socialising and getting lunch or coffee in the city centre – have upended pre-Covid trading rhythms with knock-on effects for all sectors, not least retail, hospitality and the office market itself.
The question is whether Clerys Quarter and Central Plaza are fit for the new trading realities or whether they can adapt. Although both are mixed-use developments, it must be noted they are not precisely comparable. The main thing they have in common is that they were once iconic buildings in the commercial life of the city centre.
Of the two, Clerys Quarter – bought by a consortium led by Europa Capital from its original purchaser, Deirdre Foley’s Natrium, for €63 million in 2018 – has the larger overall footprint. Some 92,600sq ft was redeveloped as office space, roughly one-third of which is housed in the Earl Building on North Earl Street and was sold to the HSE for a reported €45 million last week.
The remainder of the office space is over three floors in the redeveloped department store. There was also planning permission for a hotel development at the back of the store in the old Clerys warehouse, separated from it by Earl Place. Sold to Premier Inns in 2021 for €21.5 million, the hotel operator secured planning permission for a larger 229-bedroom hotel over nine storeys in June.
Another 18,000sq ft has been developed for F&B concessions as well as a large rooftop hospitality space to be operated by Paddy McKillen Jnr’s Press Up group.
Naturally, the focal point of the scheme is Clerys’ retail offering. The 60,000sq ft set aside for that purpose is to house two anchor tenants over two floors: H&M in one ground floor unit and part of the first floor alongside Flannels, over the other ground floor space and in the basement.
Both are highly ambitious projects but of the two, Clerys has perhaps the loftiest ambitions attached to it. In one of the brochures for the scheme, the developers describe the Clerys Quarter as “Dublin’s most iconic and exciting city centre redevelopment”, in a part of the city, O’Connell Street, that echoes the layout of “Paris’s Champs Élysées”.
The Press Up-operated rooftop is described as a “new beacon for the city”. Core Capital’s Derek McGrath said earlier this year that the redevelopment would turn O’Connell Street into a “primary destination” in Dublin. In a letter to Labour Party senator Marie Sherlock, reported on by the Irish Independent, he called on the Government to invest more in the area, adding: “We are extremely confident that this [project] will significantly contribute to the regeneration of O’Connell Street and the surrounding Dublin 1 area, from an economic, social and physical perspective.”
Lofty indeed.
Europa and its partners, Core Capital and the McKillen-controlled Oakmount, “did very, very well” to secure the brands that they did in Flannels and H&M, an industry figure opined this week. That said, the success of the entire scheme hinges on whether they can attract a “critical mass” of shoppers and businesses over to the Clerys side of the thoroughfare.
It was always going to be an uphill struggle, and the developers would have gone into the project clear-eyed about that fact. For one, converting a 100-year-old structure into a modern, energy-efficient place of business is a process “fraught with difficulties”, one expert said and the potential for cost overruns is significant. Throw in a pandemic and a once-in-a-generation bout of inflation and it is plain to see why the developers have struggled to get the scheme open on the targeted date in early 2023.
Timing issues with one of the subcontractors were also a problem, it is understood. However, the scheme was largely completed in June this year and handed over to the tenants for fit-out. The units currently leased – Prêt-a-Manger, sushi chain Rolled and, crucially, H&M – are to open on a phased basis over the coming months. Otherwise, the detail is thin on the ground.
Flannels, one of the main pillars of the scheme, could be a different story. The delayed handover seems to have been a sticking point and with the row between Mike Ashley’s company and its would-be Clerys landlords in the High Court, there is a very real prospect that one of the two retail units could be empty for a long spell. “It could put a dampener on the whole thing if it is vacant for any period of time,” one hotel industry veteran said. “It could look the worse-for-wear pretty quickly.”
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In a relatively concentrated city centre like Dublin’s, there is a symbiotic relationship between retail, tourism and the office population. The prospect of having two big retailers coupled with all the other bells and whistles promised by the redevelopers would have been appealing for Premier Inn, for example, when it bought the warehouse site to the rear of the scheme.
Taking the long view, there are certain risks associated with Clerys Quarter that industry figures are quick to highlight. “O’Connell Street has its challenges”, a property agent expert said this week. “The big challenge is the very big, wide street. It is always going to be difficult to make it work in terms of getting people over from the Henry Street side. There’s a lot of trees as well that block out the visual impact of some of those gorgeous buildings.”
There is plenty of pedestrian traffic but a lot of it is commuters travelling on their way to and from work, and tourists waiting for buses and tour guides. Office leasing in Dublin 1 has also been relatively muted since the start of Covid-19, depriving O’Connell Street – already chronically under-loved by local authorities and private investors – of a vital source of footfall.
Since the second quarter of 2020, some 576,000sq m of office space has been taken up in the city. Dublin 1 has accounted for just 99,000sq m – most of it relating to just two large developments – compared with 250,000sq m on the opposite side of the Liffey, in Dublin 2.
The north inner city remains a challenging market and, perhaps because of that, there is a tremendous amount of goodwill towards the Clerys scheme, publicly, politically and within the industry. “It is really positive for the street,” said a property agent. “It’s going to be an interesting one to see if it all pans out in the end.”
Hines and Peterson Group’s plans for Central Plaza are also ambitious but not as self-consciously worthy. Comprising 100,000sq ft of desk space, Central Plaza is primarily office-led, with 32,500sq ft of retail space set within the old central bank building and in adjacent properties, 16,000sq ft oriented towards food and beverage retail and a 15,500sq ft rooftop hospitality element.
In 2018, Hines secured WeWork as its anchor tenant for its premium office scheme. The co-working company was signed up to take over eight floors of the development, effectively subletting it then to third-party businesses looking for flexible, modern desk space in the heart of Dublin. There was always an element of risk associated with this arrangement.
WeWork tends to hold its leases in special purpose vehicles, legally distinct entities that industry sources say are easier to walk way from in the event of difficulty or economic upheaval. This would, however, have been priced into the Hines deal, one property agent said. “It always comes with a health warning from a landlord perspective when you engage with WeWork on a lease,” Shane Duffy, office agency director at Savills Ireland, said in August.
Having acquired the building in 2016, the appeal for the developers would have been the security associated with signing up an anchor tenant so early in the process. “What you want to do as a developer is get your space leased, ideally as early as possible in the development process before construction even commences,” John McCartney, director and head of research at BNP Paribas Real Estate said this week. “If you can’t do that – and it is generally a challenge to pull that one off – you at least try do it during the construction phase. It de-risks the project to a great degree.”
What happened next was something that no one could have foreseen. After achieving a $47 billion (€44 billion) valuation in 2019, one pandemic, one disastrous attempt at a stock market flotation and one chief executive later, WeWork collapsed into Chapter 11 bankruptcy in the US earlier this week, giving it protection from its creditors.
The company has been at pains to highlight the restructuring process that will now commence will not affect the company’s locations outside the US and Canada. However, that does not mean WeWork’s leases in Ireland – where its total footprint in the capital amounts to around 37,000sq m, making it one of the biggest individual tenants in the city – will be unaffected.
In September, WeWork chief executive David Tolley said the group would work with its landlords “globally” to renegotiate “nearly all of its leases”. Hines declined to comment on whether that process has been initiated in relation to Central Plaza. All indications are that the fit-out of the office space will continue on the assumption that WeWork will take up the space.
However, the status of that fit-out is unclear. The space was handed over to WeWork in recent months and contractors have been on site since October, it is understood. At this stage, fit-out is expected to be completed in the second quarter of next year.
As The Irish Times reported this week, if a hypothetical tenant of WeWork’s size intended to vacate its Dublin leases altogether, the 37,000sq m of vacant space it would create would be extremely challenging for the market to digest. That is particularly true at the moment. Office vacancy rates are rising due to a relative glut of supply coming on stream compared with demand as businesses and other employers continue to juggle hybrid working arrangements.
We Work is not a normal occupier, however. “Although it is the leaseholder, the space is physically occupied by other businesses that need business space, by definition,” McCartney said. “If the worst came to worst and WeWork was to pull out, the space is still occupied by somebody and the most likely course of events, I think, is that those occupiers would either stay in situ and just have a different landlord.”
This has already happened at one of WeWork’s Dublin spaces. It recently handed back the space it was occupying at the George’s Quay House (1GQ) to the building’s new owner. Corum Eurion, a French real estate investment fund, acquired 1GQ – the former headquarters of Ulster Bank currently majority occupied by the Office of Public Works – for more than €80 million in September.
After WeWork handed back the space, the fund then worked out a new arrangement with the occupier, who had been leasing the space from WeWork.
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It is not clear, however, whether WeWork had signed up any tenants for its Central Plaza space and Hines declined to shed any light on the matter.
While challenging, the outlook for both developments within the industry is relatively positive. On the retail and F&B side, consumer spending has held up well nationally this year with the Central Statistics Office’s retail sales index floating around – at times, slightly below and slightly above – pre-Covid volumes. The Irish economy continues to churn out jobs.
Significant question marks hang over both schemes, however.
The tourism sector is yet to fully recover from the pandemic, continuing to underperform relative to early 2022 levels, according to the most recent data from the statistics agency. On the office side, it remains to be seen whether the return to workplaces will continue to ratchet up or if the current split is a permanent feature of life in the capital.
Either way, the pipeline of supply is expected to fall off somewhat next year, releasing some of the pressure that has built up in the market in 2023. They are good buildings in good locations, one industry figure said this week. “I don’t see them being in any worse position than any others that are coming to completion.”
