Property cycles in Dublin the anatomy of boom and slump in the industrial and office property sectors

The Economic and Social Review, Vol. 18, No. 4, July 1987, pp. 237-256

Property C y c l e s in D u b l i n : the A n a t o m y of B o o m and

S l u m p in the Industrial and Office Property Sectors

A N D R E W M a c L A R A N

Trinity College, Dublin

M O R A G M a c L A R A N

Sandymount Community Survey, Dublin

P A T R I C K M A L O N E

Plymouth Polytechnic

Abstract: The property development process is the means by which built space is created to accom­

modate the variety of urban functions. The paper examines the existence of boom-slump cycles in the industrial and office property development sectors and their relationship to Irish macroeconomic trends. The consequences of boom and slump are examined with respect to the construction sector and in relation to Dublin's built environment.

I I N T R O D U C T I O N

a flow o f rental income f r o m the occupiers. As the economic returns t o all the interests involved i n the p r o p e r t y development process are derived f r o m the occupiers o f developments, i t is the demand for b u i l t space w h i c h u l t i ­ mately controls the scale o f activity w i t h i n the p r o p e r t y development i n d u s t r y .

The aim o f the paper is t o investigate those economic factors w h i c h have affected the degree o f a c t i v i t y i n the i n d u s t r y and note some ramifications o f its cyclical tendency. As the scale o f demand for properties is a derived demand based u p o n the degree o f a c t i v i t y i n the wider economy, the paper concentrates u p o n fluctuations i n the scale o f user demand for buildings. However, i t should be recognised that the supply side represented b y the p r o p e r t y development process comprises a heterogeneity o f separate interests (landowners, commercial and i n s t i t u t i o n a l developers, c o n s t r u c t i o n com­ panies, financiers and long-term investors i n p r o p e r t y ) whose scale o f involve­ m e n t and terms o f engagement i n the p r o p e r t y development process are based u p o n criteria w h i c h differ significantly f r o m interest t o interest. Moreover, certain o f those interests, n o t a b l y financiers and i n s t i t u t i o n a l investors, are engaged i n p r o p e r t y o n l y as one p o t e n t i a l arena o f activity f r o m a variety o f c o m p e t i n g fields o f o p e r a t i o n . A d d i t i o n a l l y , those interests w h i c h are more closely associated w i t h p r o p e r t y development alone, i n c l u d i n g commercial developers and c o n s t r u c t i o n companies, switch the geographical focus o f their operations i n t e r n a t i o n a l l y t o benefit f r o m spatial variations i n development cycles. Thus, because o f the c o m p l e x i t y o f interests involved and the v a r i a b i l i t y i n their terms for engagement, the supply o f b u i l t space cannot be treated as a simple response t o changes i n the scale and p a t t e r n o f demand emanating f r o m the user markets alone. However, detailed analysis o f these terms o f engagement lies b e y o n d the scope o f the current paper and is developed elsewhere (see M a c L a r a n and Malone, 1986).

I I D E V E L O P M E N T C Y C L E S

The cyclical nature o f urban development, characterised b y periods o f frenetic a c t i v i t y f o l l o w e d b y intervals o f relative quiescence, has been recog­ nised b y a w i d e b o d y o f research f o l l o w i n g Cairncross's (1934) study o f the b u i l d i n g i n d u s t r y i n Glasgow between 1870 and 1914. Summerson (1962) was able t o i d e n t i f y distinct long swings i n L o n d o n ' s development t h a t were present as early as the eighteenth c e n t u r y :

peace and war, and a less obvious r e l a t i o n t o the increase o f L o n d o n ' s p o p u l a t i o n . (Summerson, 1 9 6 2 , p . 24)

B u i l d i n g cycles o f considerably shorter d u r a t i o n t h a n these l o n g swings, y e t longer t h a n the "general business c y c l e " , were also i d e n t i f i e d f o r a n u m b e r o f cities i n the late nineteenth and early t w e n t i e t h centuries ( A s h t o n , 1 9 5 9 ; Cooney, 1960; Lewis, 1 9 6 1 ; Saul, 1 9 6 2 ) . I n searching for an e x p l a n a t i o n o f such cycles o f intermediate d u r a t i o n o f between 15-25 years w h i c h are associated w i t h periods o f investment i n the b u i l t environment (often t e r m e d Kuznets cycles), a number o f authors have investigated t h e i r relationship w i t h the i n t e r n a t i o n a l movements o f p o p u l a t i o n and capital (Thomas, 1954) and the f l u c t u a t i o n o f c o m m o d i t y prices and interest rates (Warren and Pearson, 1 9 3 7 ) . A l t h o u g h m u c h a t t e n t i o n has been directed towards cyclical fluctuations i n either housing c o n s t r u c t i o n or i n aggregate measures o f b u i l d i n g activity there has been a recent g r o w t h o f interest i n b o t h office development (Barras, 1 9 7 9 ; Catalano and Barras, 1980; D a l y , 1982) and the industrial p r o p e r t y development sector ( B o d d y and Barrett, 1 9 7 9 ; B o d d y , 1982; C a r d e w a n d R i c h , 1 9 8 2 ) .

Research has also focused u p o n the relationships between cycles evident i n different types o f development a c t i v i t y (Lewis, 1965; G o t t l i e b , 1 9 7 6 ) , w h i l e Harvey ( 1 9 7 8 ) has d r a w n u p o n such w o r k i n order t o provide a more general theoretical f r a m e w o r k for comprehending the p r o d u c t i o n o f the b u i l t environment. However, such research is frequently hampered b y the lack o f local economic indicators appropriate t o the investigation o f b u i l d i n g cycles i n particular cities. This is u n f o r t u n a t e because " i n the last resort the demand for b u i l d i n g is a f u n c t i o n o f local c o n d i t i o n s " (Lewis, 1965, p . 2 ) .

I I I M E T H O D O L O G Y

A variety o f data sources was e m p l o y e d i n the analysis. Statistics relating to economic fluctuations and macro indicators o f a c t i v i t y i n the b u i l d i n g i n d u s t r y were d r a w n f r o m official publications o f the Central Bank, the Central Statistics Office, A n Foras Forbartha, the Department o f Finance and the D e p a r t m e n t o f I n d u s t r y , Trade, Commerce and T o u r i s m . These sources furnished national scale indicators for the t i m e p e r i o d 1960-1983 (see Figures 1 and 2 ) .

Data relating t o the development o f industrial space i n the D u b l i n area between 1960 and m i d - 1 9 8 2 were obtained f r o m an analysis o f valuers' books held b y the V a l u a t i o n Office o f the Commissioner o f V a l u a t i o n , and

f r o m detailed records o f the East Regional Office o f the I n d u s t r i a l Develop­ ment A u t h o r i t y (see MacLaran and Beamish, 1985). Questionnaire surveys o f estate agents and interviews w i t h developers provided i n f o r m a t i o n o n the scale o f office completions between 1960 and 1983 (see Malone, 1985). These data are presented diagramatically i n Figures 2a-2d.

F i n a l l y , a series o f in-depth interviews were carried out w i t h a wide range of p r o p e r t y managers f r o m financial institutions w h i c h possessed significant p o r t f o l i o s o f p r o p e r t y i n the D u b l i n area, and these generated i n f o r m a t i o n about i n s t i t u t i o n a l p o l i c y regarding the t i m i n g o f p r o p e r t y purchase and scale o f acquisition.

I V T H E I R I S H E C O N O M Y A N D P R O P E R T Y C Y C L E S I N D U B L I N

1 The First Property Boom

The 1960s m a r k e d a p e r i o d o f rapid economic g r o w t h i n Ireland f o l l o w i n g years i n w h i c h real levels o f national p r o d u c t i o n had experienced l i t t l e change or had even declined absolutely, and f r o m w h i c h many had sought relief t h r o u g h emigration. Figure l a reveals that the decade witnessed a rising scale of net capital inflows i n t o the Irish economy, w i t h an expansion o f foreign investment i n i n d u s t r i a l p r o d u c t i o n , p r o p e r t y and the national debt. B y the end o f the decade the gross national p r o d u c t had g r o w n b y almost 50 per cent, at an average rate o f around 4 per cent per annum. Most significantly, the establishment and g r o w t h o f e x p o r t orientated manufacturing activities resulted i n an average annual expansion o f industrial o u t p u t o f 7 per cent, generating a 240 per cent increase i n the v o l u m e o f industrial exports by 1 9 6 9 .1 O n l y i n 1966 d i d the g r o w t h i n the scale o f the gross national p r o d u c t

1. Figures relating to industrial export values, especially during the 1970s and 1980s, need to be treated with caution because of the transfer pricing policies pursued by multi-national companies in order to reduce their tax liabilities.

r - n - T T f T > T T { m h 1 i f 6 J 70

P U B U C C A P I T A L P I O C I A M M E

DEAL VALUE Of PfSSONAl SAVINGS

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I 19601 I

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fail t o exceed 2 per cent, a t t r i b u t a b l e t o credit restraints imposed b y the government d u r i n g the previous year i n order t o curb i n f l a t i o n a r y pressures i n the economy and tackle the growing balance o f payments difficulties (Figure l b ) . Nevertheless, even i n that year manufacturing exports rose b y 17 per cent i n value terms, t h o u g h levels o f u n e m p l o y m e n t also increased, p a r t i c u l a r l y i n the c o n s t r u c t i o n i n d u s t r y w h i c h registered a rise f r o m 9.4 per cent i n 1965 t o 10.6 per cent i n the f o l l o w i n g year.

By the end o f 1 9 6 6 , the government's corrective actions allowed a relaxa­ t i o n o f credit restraints and p e r m i t t e d a succession o f budgets during the f o l l o w i n g years w h i c h aimed at p r o m o t i n g economic g r o w t h , reaching 7 per cent i n 1969. Figure l c shows t h a t the value o f the Public Capital Programme rose rapidly d u r i n g the late 1960s, and this was especially marked w i t h respect t o the I n d u s t r y and I n d u s t r i a l L o a n Finance c o m p o n e n t (Figure I d ) w h i c h grew i n real terms b y 13 per cent, 43 per cent and 35 per cent during 1967, 1968 and 1969, respectively. This encouragement t o industrial pro­ d u c t i o n c o n t r i b u t e d t o the rising rate o f g r o w t h i n the volume o f manufac­ t u r i n g o u t p u t f r o m 2.4 per cent i n 1966 t o over 10 per cent t w o years later.

The relaxation o f the mid-decade credit restraints was f o l l o w e d b y an expansion o f t o t a l domestic lending b y banks, w h i c h can be seen from Figure l e t o have increased i n real terms b y 15 per cent during 1968 alone. This expansion was associated w i t h a large injection o f foriegn capital i n t o the Irish e c o n o m y , a rapid g r o w t h i n the role o f the non-associated banks and a r e d u c t i o n i n the real costs o f b o r r o w i n g after 1966. Associated bank lending t o m a n u f a c t u r i n g i n d u s t r y expanded r a p i d l y , p a r t i c u l a r l y d u r i n g 1968 w h e n i t grew b y over 4 0 per cent, and was f o l l o w e d b y a significant rise i n the scale o f lending t o b o t h the c o n s t r u c t i o n i n d u s t r y and t o p r o p e r t y companies, shown i n Figures I f and l g . Sustained increases i n the level of personal savings are s h o w n b y Figure l h t o have taken place after 1966, rising i n real terms b y over 6 per cent per annum d u r i n g the late 1960s, and this facilitated a c o n t i n u e d expansion i n life assurance business. Figures l i and l j show t h a t between 1966 and 1970 the number o f new premiums issued rose b y 47 per cent and t h a t this represented an annual g r o w t h i n p r e m i u m income o f a r o u n d 8 per cent i n real terms. A substantial propor­ t i o n o f these funds was channelled i n t o p r o p e r t y investment (see Malone, 1 9 8 1 ; M a c L a r a n , Malone and Beamish, 1985), and Table 1 illustrates the growing significance o f real p r o p e r t y i n the p o r t f o l i o s o f b o t h the Irish L i f e and the N e w I r e l a n d Assurance Companies during the early 1970s.

COMPLETION O' INDUSTRIAL SPAC E P R O P E R T Y C Y C L E S I N D U B L I N 243

(a)

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p a r t i c u l a r l y m a r k e d i n w h i t e collar occupations, the number o f office jobs g r o w i n g b y a r o u n d 37 per cent between 1961 and 1 9 7 1 . The effects were most evident i n central D u b l i n where the n u m b e r o f office workers increased f r o m a r o u n d 42,000 t o over 72,000 d u r i n g t h a t p e r i o d , g r o w t h being especially r a p i d i n the commercial and p u b l i c sectors (Bannon, 1973 and 1979). Con­ c u r r e n t l y , the restructuring o f i n d u s t r i a l activity i n the region, associated w i t h the establishment o f new plants o n greenfield sites and the decen­ tralisation o f firms f r o m central locations d u r i n g the late 1960s and early

1970s, generated a considerable demand for new i n d u s t r i a l space i n the D u b l i n sub-region. T h u s , a survey o f the 514 establishments w h i c h had located o n i n d u s t r i a l estates i n the outer area o f the c i t y between 1965 and

1974 revealed that more t h a n a quarter had relocated f r o m the inner c i t y ( D u b l i n C o r p o r a t i o n Planning Department, 1975).

T a b l e 1: The Changing Significance of Property in the Portfolios of Irish Life and New

Ireland Assurance Companies during Selected Years Percentages of Total Portfolio by Value

1960 1965 1970 1971 1973 1974 1975 1980 1983

I r i s h L i f e (i (ii!

) 1 5 . 0 ) 9.5 13.2 12.2 13.7 13.8 24.5 1 1 . 8

2 7 . 9 11.2

28.1 11.4

2 5 . 4 1 0 . 0

2 5 . 4 2.7

19.3 1.8

N e w I r e l a n d (i ) 1 2 . 9 ) 1 9 . 2

1 0 . 4 3 4 . 3

1 3 . 4 3 4 . 6

2 0 . 3 3 4 . 4

25.7 2 4 . 4

3 6 . 1 2 3 . 6

3 5 . 0 2 2 . 8

11.1 1 2 . 9

10.2 8.2

Notes: P r o p e r t y (i) i n c l u d e s l a n d , h o u s e p r o p e r t y , office f u r n i t u r e , e t c .

(ii) c o m p r i s e s mortgages.

Sources: D e p a r t m e n t o f I n d u s t r y , T r a d e , C o m m e r c e a n d T o u r i s m : A s s u r a n c e C o m p a n i e s ,

S t a t i o n e r y O f f i c e , D u b l i n — various y e a r s .

T a b l e 2: Land Use Analysis in the Inner City Area 1966-1974

Gross floor Gross floor

Changes

Main uses area 1974 area 1966 Changes

(sq. metres) (sq. metres) Actual Percentage

R e s i d e n t i a l 3 , 1 0 0 , 7 0 0 3 , 1 8 8 , 9 0 0 - 8 8 , 2 0 0 - 2 . 7 7 O f f i c e s 1 , 7 4 9 , 2 0 0 8 9 8 , 6 0 0 + 8 5 0 , 6 0 0 + 9 4 . 6 6 I n d u s t r y 1 , 2 7 2 , 4 0 0 1 , 8 2 2 , 6 0 0 - 5 5 0 , 2 0 0 - 3 0 . 1 9 Wholesale 9 4 1 , 3 0 0 9 1 7 , 3 0 0 + 2 4 , 0 0 0 + 2 . 6 2 C i v i c & p u b l i c 7 7 6 , 0 0 0 6 5 8 , 6 0 0 + 1 1 7 , 4 0 0 + 1 7 . 8 3 R e t a i l 6 6 8 , 2 0 0 5 9 0 , 5 0 0 + 7 7 , 7 0 0 + 1 3 . 1 6 E d u c a t i o n 4 4 2 , 5 0 0 3 2 8 , 2 0 0 + 1 1 4 , 3 0 0 + 3 4 . 8 3 L e i s u r e & e n t e r t a i n m e n t 3 6 5 , 6 0 0 3 8 2 , 8 0 0 - 1 7 , 2 0 0 - 4 . 4 9 O t h e r uses 3 5 8 , 8 0 0 2 7 1 , 1 0 0 + 8 7 , 7 0 0 + 3 2 . 3 5 D e r e l i c t buildings a n d v a c a n t spaces 1 9 5 , 9 0 0 2 0 3 , 7 0 0 - 7 , 8 0 0 - 3 . 8 3

Source: D u b l i n C o r p o r a t i o n P l a n n i n g D e p a r t m e n t , " L a n d U s e i n the I n n e r C i t y A r e a " , Working Paper 9, A p r i l 1 9 7 5 .

Figures 2a t o 2d show that the p r o d u c t i o n o f industrial buildings and offices was accomplished d u r i n g t w o major phases o f o u t p u t , whether measured i n terms o f floorspace or the n u m b e r o f buildings completed. The year 1967 m a r k e d a major t u r n i n g p o i n t i n the development o f i n d u s t r i a l p r o p e r t y i n the D u b l i n area. U n t i l t h a t t i m e fewer than ten units accounting for a t o t a l o f less t h a n 6 0 , 0 0 0 sq. f t . (5,575 sq. m . ) o f space had been com­ p l e t e d annually. D u r i n g 1967 the q u a n t i t y o f industrial space c o m p l e t e d i n the D u b l i n area more t h a n d o u b l e d , d o u b l i n g again d u r i n g 1968 and d o u b l i n g y e t again i n 1969. The number o f separate units c o m p l e t e d also increased f r o m o n l y 9 i n 1966 t o 63 i n 1969. The spatial characteristics o f these developments d u r i n g the p e r i o d 1960 t o 1982 have been examined i n detail elsewhere (see M a c L a r a n and Beamish, 1985).

I n the office sector the demand for space resulted i n a significant real u p w a r d movement i n office rents d u r i n g 1967, and between 1971 and 1972 the rate o f rental increase had reached over 20 per cent per a n n u m w h i c h was w e l l over t w i c e the level o f general i n f l a t i o n . The year 1968 witnessed a rise i n the scale o f c o m p l e t i o n o f offices, the q u a n t i t y o f space and the number o f developments reaching c o m p l e t i o n b o t h d o u b l i n g d u r i n g t h a t year (see Malone, 1981).

Figure 2e demonstrates t h a t these trends were reflected i n a rising real level o f f i x e d capital f o r m a t i o n i n b u i l d i n g and c o n s t r u c t i o n i n the e c o n o m y as a w h o l e d u r i n g the late 1960s. However, a c o m b i n a t i o n o f factors resulted i n an i n t e r r u p t i o n t o the u p w a r d t r e n d i n the p r o p e r t y cycle d u r i n g

g r o w t h o f the late 1960s, industrial p r o d u c t i o n nationally reached a tem­ porary plateau i n w h i c h reduced levels o f investment i n new activity resulted f r o m apprehension about the p r o f i t a b i l i t y o f new investment because o f increasing wage and raw material costs. B o t h p r o p e r t y sectors were adversely affected b y i n d u s t r i a l unrest. A p r o t r a c t e d strike by bank workers resulted i n a very restricted m o n e y m a r k e t and coincided w i t h a dispute i n the cement industry. F u r t h e r m o r e , i n order t o check the growing demand pressures i n the economy the real overall value o f the Public Capital Programme remained unchanged d u r i n g 1970. I n D u b l i n , these trends resulted i n a c u r t a i l m e n t o f the rate o f expansion o f i n d u s t r i a l space d u r i n g 1970, f o l l o w e d b y a 46 per cent r e d u c t i o n i n the number o f industrial units completed d u r i n g 1 9 7 1 . The c o m p l e t i o n o f office space also declined d u r i n g 1970 b y around 14 per cent in comparison t o the previous year. Together these had a p a r t i c u l a r l y severe effect u p o n the c o n s t r u c t i o n i n d u s t r y , u n e m p l o y m e n t i n that sector rising f r o m 11.2 per cent t o 14.6 per cent o f the labour force. As can be seen f r o m Figure 2e, for the first time since 1966 the real level o f fixed capital f o r m a t i o n t h r o u g h b u i l d i n g and c o n s t r u c t i o n failed t o register any g r o w t h .

However, sluggish g r o w t h i n industrial p r o d u c t i o n and l i m i t e d activity w i t h i n the c o n s t r u c t i o n i n d u s t r y resulted i n reduced demand for credit during 1 9 7 1 , a year i n w h i c h the level o f the Central Bank's credit guidelines t o lending i n s t i t u t i o n s failed to be reached. The level o f net capital i m p o r t a ­ t i o n , illustrated i n Figure l a , simultaneously increased and the real cost o f b o r r o w i n g was further reduced. These conditions o f abundant capital and labour power p e r m i t t e d a significant expansion of p r o p e r t y development activity. I n D u b l i n , the number o f industrial units completed d u r i n g 1972 was more than twice t h a t o f the previous year, and the q u a n t i t y o f space produced rose by over 160 per cent to 1.65 m i l l i o n sq. f t . (153,000 sq. m . ) m a r k i n g the peak level o f o u t p u t during the first b o o m . The f o l l o w i n g year witnessed the peaking o f the office b o o m w i t h a t o t a l o f 769,000 sq. f t . (71,440 sq. m . ) o f floorspace i n nineteen developments.

2 The Onset of Slump Conditions

very l i m i t e d demand for new industrial space d u r i n g the f o l l o w i n g years. I n D u b l i n an over-supply o f i n d u s t r i a l space emerged, especially i n the case o f units larger than 15,000 sq. f t . (1,395 sq. m . ) , and as the level o f rental increase f o r i n i t i a l lettings fell b e h i n d the general rate o f i n f l a t i o n d u r i n g 1973 many speculative developments were shelved and c o n s t r u c t i o n a c t i v i t y was often halted leaving buildings unfinished. A l t h o u g h a n u m b e r o f these properties were subsequently purchased cheaply b y speculative investors w h o c o m p l e t e d t h e m i n preparation for an anticipated increase i n demand, the level o f i n d u s t r i a l completions reached its lowest level i n 1977 w h e n l i t t l e over 2 0 0 , 0 0 0 sq. f t . (18,580 sq. m . ) o f floorspace was produced i n o n l y 23 units. The real r e t u r n f r o m new office lettings also declined after 1972, t h o u g h the level o f increase for i n i t i a l rents remained above the level o f general i n f l a t i o n u n t i l late i n 1976. While Figure 2c indicates that the peak level o f c o m p l e t i o n for office space was achieved d u r i n g 1973, the subsequent r e d u c t i o n i n o u t p u t appears t o be more erratic than that pertaining t o industrial space. B o t h reveal an i n i t i a l l y major drop i n o u t p u t , i n 1973 i n the case o f industrial p r o p e r t y and 1974 i n the case o f offices, f o l l o w e d b y a brief recovery and subsequent decline. However, an e x a m i n a t i o n o f Figure 2i reveals that a significant p r o p o r t i o n o f the t o t a l amount o f office space completed over the f o l l o w i n g years, a m o u n t i n g t o 70 per cent between 1977 and 1979, was taken up by owner-occupiers and i t is believed that m u c h o f the remaining floorspace was pre-let. This p e r i o d o f d o w n t u r n was also one i n w h i c h the c o n t r i b u t i o n o f commercial p r o p e r t y development companies such as H a r d w i c k e and Dodder was o f declining significance i n the creation o f office space (see Figure 2g), being associated w i t h the development o f o n l y 11 per cent o f the t o t a l area developed d u r i n g 1979 i n contrast w i t h r o u g h l y 90 per cent i n 1973 (see Malone, 1981).

A f t e r 1974 the associated banks reduced their level o f lending t o the b u i l d i n g i n d u s t r y and t o p r o p e r t y companies (Figures I f and l g ) . N a t i o n a l l y , the level o f fixed capital f o r m a t i o n i n c o n s t r u c t i o n remained at a l o w level u n t i l 1978 (Figure 2e) w h e n the volume o f cement sales recorded i n Figure 2j registered a significant rise w h i c h heralded the onset o f the second p r o p e r t y b o o m .

3 The Second Boom and Subsequent Slump

recession w h i c h i t had experienced i n 1974 and 1975. The gross national p r o d u c t grew b y 3V2 per cent d u r i n g 1975, 5 per cent i n 1977 and b y 7 per cent i n the f o l l o w i n g year. Figures l c and I d show that substantial real increases i n the scale o f the Public Capital Programme had been budgeted for d u r i n g those years, while the 1977 budget was p a r t i c u l a r l y n o t e w o r t h y for its p u b l i c sector e m p l o y m e n t expansion, i n its granting a r e d u c t i o n i n the rate o f stamp d u t y o n offices as a stimulus t o development a c t i v i t y , and for its substantial concessions t o i n d u s t r y i n order t o boost the scale o f its investment. The I n d u s t r i a l Development A u t h o r i t y ' s ( I D A ) incentives for industry also created a climate o f o p t i m i s m for Irish i n d u s t r y w h i c h was encouraged t o expand, and the volume o f manufacturing p r o d u c t i o n grew b y over 8 per cent per annum between 1976 and 1979. A fairly steady r e d u c t i o n i n interest rates since early 1974, associated w i t h reduced demand for credit facilities d u r i n g the recession and an increased scale o f foreign capital f l o w i n g i n t o the economy d u r i n g 1976 and 1977, resulted i n the availability o f relatively cheap credit b y the f o u r t h quarter o f 1977. Figure l e shows t h a t the scale o f bank lending t o private borrowers d u r i n g t h a t year registered a r a p i d increase, rising b y over 16 per cent i n real terms and f o l l o w e d b y a further 21 per cent rise d u r i n g the f o l l o w i n g year, the demand for credit f r o m manufacturing and f r o m the c o n s t r u c t i o n i n d u s t r y being p a r t i c u l a r l y marked. B y late 1977 the user demand for industrial space i n D u b l i n had reached a stage at w h i c h estate agents were indicating that a shortage o f prime industrial space was emerging. D u r i n g 1978 the rise i n industrial rents again o u t s t r i p p e d the general rate o f i n f l a t i o n , rising more than twice as rapidly as general i n f l a t i o n and outpacing the i n f l a t i o n rate for b u i l d i n g materials. Office rents experienced an even greater real rate o f increase for i n i t i a l lettings (13 per cent). These c o n d i t i o n s facilitated a second development b o o m i n w h i c h the surplus capacity i n the c o n s t r u c t i o n i n d u s t r y , reflected by u n e m p l o y m e n t rates o f 22 per cent among b u i l d i n g workers i n 1977, was progressively taken u p .

Scottish Provident, Canada L i f e , the N a t i o n a l M u t u a l Life Association o f Australasia, the Irish Pension F u n d Property U n i t Trust and also d r a w n to­ wards i n d u s t r i a l p r o p e r t y investment were a number o f company pension funds seeking t o enhance their p o r t f o l i o s o f real p r o p e r t y b u t lacking the funds t o acquire more costly office properties. I n a d d i t i o n , the state-owned I n d u s t r i a l Credit C o r p o r a t i o n acquired over 60 industrial units d u r i n g these four years, a m o u n t i n g t o nearly 800,000 sq. f t . (over 74,000 sq. m . ) o f space, while the A l l i e d Irish Investment Bank also made significant acquisitions. ( F o r a discussion o f i n s t i t u t i o n a l investment and the role o f real p r o p e r t y i n Ireland, see MacLaran, 1986).

By the early 1970s i t had become increasingly evident that the I D A ' s regional p o l i c y o f n o t p r o m o t i n g i n d u s t r i a l development i n the D u b l i n area while encouraging new industries t o locate i n the regions was achieving a measure o f success. Between 1966 and 1981 the net increase i n manufactur­ ing e m p l o y m e n t i n D u b l i n was o n l y 6.5 per cent compared t o 11.9 per cent for the state as a w h o l e . Moreover, the scale o f j o b losses i n D u b l i n d u r i n g the 1974-1975 recession resulted i n a net loss o f over 12,000 manufacturing jobs i n D u b l i n between 1973 and 1977, compared t o a target o f 7,300 a d d i t i o n a l jobs ( I n d u s t r i a l Development A u t h o r i t y , 1978). The long-established industries o f the inner c i t y were p a r t i c u l a r l y hard h i t b y the recession. Thus, i n 1976 the I D A commenced p r o m o t i n g D u b l i n as an i n d u s t r i a l centre and became involved i n the direct p r o v i s i o n o f i n d u s t r i a l properties as w e l l as p a r t i c i p a t i n g i n j o i n t development ventures w i t h private developers and i n s t i t u t i o n a l investors (see MacLaran and Beamish, 1985). The impact o f its involvement can be gauged f r o m the fact that b y m i d - 1 9 8 2 i t had i n some degree been associated w i t h the development o f nearly one-third o f the factory units b u i l t i n the D u b l i n area since 1960 and had become the largest owner o f i n d u s t r i a l space i n the area. This a c t i v i t y had the effect o f delaying the i m p a c t o f the onset o f reduced private sector involvement i n the develop­ m e n t o f factory space after 1978, and has attracted criticism f r o m private sector interests for having saturated the market for factory space.

1983, 1981 m a r k e d the peak year i n terms o f traded (leased) space.

The scale o f development i n the t w o sectors parallels the rising real level o f fixed capital f o r m a t i o n i n b u i l d i n g and c o n s t r u c t i o n i n the economy as a whole d u r i n g the late 1970s (Figure 2e). Thus, there were significant cor­ relations (at the 1 per cent level) between the level o f fixed capital f o r m a t i o n and the scale o f c o n s t r u c t i o n o f industrial space i n D u b l i n between 1960 and 1981 (Pearson's r = 0.877) as w e l l as w i t h the annual number o f develop­ ments reaching c o m p l e t i o n (Pearson's r = 0.910). Similarly, the relationship between the scale o f development o f offices between 1960 and 1983 and the level o f f i x e d capital f o r m a t i o n i n b u i l d i n g and c o n s t r u c t i o n was also high (Pearson's r = 0.766 for office space and Pearson's r = 0.812 for the number o f developments reaching c o m p l e t i o n ) . However, this second p e r i o d o f large-scale development a c t i v i t y reached its peak at a t i m e when Irish economic expansion was r a p i d l y faltering, especially i n the wake o f massively inflationary increases i n o i l prices w h i c h d o u b l e d between 1978 and 1980. Difficulties i n o b t a i n i n g occupiers for n e w l y completed industrial buildings, rising interest rates associated w i t h large-scale p u b l i c sector b o r r o w i n g , together w i t h rising b u i l d i n g costs w h i c h outpaced the rate o f increase i n i n d u s t r i a l rents d u r i n g 1980 (and office rents during 1982), resulted i n a greatly reduced o u t p u t o f industrial p r o p e r t y development after 1 9 8 1 . The industrial p r o p e r t y sector entered another p e r i o d o f quiescence i n w h i c h considerable quantities o f space were t o remain vacant and rental levels for new lettings remained relatively unchanged or even declined absolutely d u r i n g the follow­ ing three years.

The longer t i m e scale for on-site c o m p l e t i o n o f office developments masks a considerably reduced scale o f development activity i n this sector after

V T H E C Y C L E O F B O O M A N D S L U M P

F r o m the foregoing e x a m i n a t i o n o f development cycles i n t w o p r o p e r t y sectors a number o f interesting points emerge. The appearance o f a substan­ tial over-supply o f financial capital sufficient t o generate relatively cheap credit and some evidence f o r an increased s u p e r f l u i t y o f labour power i n the c o n s t r u c t i o n i n d u s t r y w h i c h holds d o w n a significant element i n b u i l d i n g costs are features w h i c h are c o m m o n t o the commencement o f b o t h periods o f b o o m . T h e y do l e n d support t o Harvey's ( 1 9 8 2 ) c o n t e n t i o n that the b u i l t e n v i r o n m e n t represents a channel o f investment for periodic surpluses o f capital and labour power. However, these do n o t represent sufficient con­ ditions for the i n i t i a t i o n o f a development b o o m , for user demand must be f o r t h c o m i n g for development p r o f i t t o be realised. Rising user demand for floorspace under c o n d i t i o n s i n w h i c h the supply o f n e w l y b u i l t space remains relatively inelastic due t o its slow pace o f p r o d u c t i o n , generates an increase in rental levels for i n i t i a l lettings. Enhanced rental values render p r o f i t a b l e those schemes w h i c h had previously been considered " r i s k y " or " m a r g i n a l " , encouraging an expansion o f the supply o f space t h r o u g h new development. However, no mechanisms exist t o ensure that the p r o d u c t i o n o f space is exactly t a i l o r e d t o m a t c h demand. I n the case o f office developments w h i c h may take a r o u n d three years t o reach c o m p l e t i o n , there is l i k e l y t o be an extended p e r i o d d u r i n g w h i c h development a c t i v i t y attempts t o catch up w i t h demand and i n w h i c h rising rents induce more and more development a c t i v i t y . A l t h o u g h the development t i m e scale for i n d u s t r i a l space is shorter, its far greater susceptibility t o the vagaries o f the business cycle render the development o f speculative ventures very risky as the demand for space may r a p i d l y disappear. W i t h regard t o b o t h sectors, i n t i m e the rising tide o f com­ pletions and the r e d u c t i o n i n the scale o f user demand has the effect o f h a l t i n g the u p w a r d t r e n d i n rental levels. As an over-supply o f space emerges, rental levels for new lettings remain static or m a y even decline absolutely. Given t h a t the effect is t o render new schemes p o t e n t i a l l y u n p r o f i t a b l e , the level o f development a c t i v i t y is consequently reduced, while those schemes w h i c h do proceed are l i k e l y t o be either pre-let or for owner o c c u p a t i o n . Similar sequences o f events have been shown t o characterise p r o p e r t y development cycles i n L o n d o n (Barras, 1979) and Sydney (Daly, 1982). W i t h respect t o office development i n L o n d o n , Barras summarises the events u n d e r l y i n g the degree o f engagement b y development interests as f o l l o w s :

p o t e n t i a l p r o f i t a b i l i t y o f development. Developers are encouraged t o initiate schemes, although i t w i l l be three t o four years before they are completed and can be added t o the stock o f available space. I f demand continues t o grow, available space o n the market w i l l further decline and developers w i l l continue t o initiate new schemes. By the t i m e the " f i r s t w a v e " o f developments are coming o n t o the market, there is a p o t e n t i a l over-supply f r o m the volume o f schemes w h i c h have already been started. T h o u g h the b o o m appears at its height, the p r o f i t a b i l i t y of new schemes is i n fact m u c h reduced. However, o n l y when the over-supply actively materialises does development activity slacken off. B y this t i m e the volume o f n e w l y developed space coming o n t o the market causes rents t o stabilise or fall, yields t o rise and capital values t o fall. Development then o n l y continues at a l o w level u n t i l the supply o f available prime space has declined sufficiently for the cycle t o begin again. (Barras, 1979, p . 1).

I n D u b l i n , b o t h o f the periods o f b o o m i n g p r o p e r t y development were characterised b y an over-involvement i n speculative ventures w h i c h r-esulted in an increase i n the number o f vacant premises. This stemmed the tide o f rising rental levels at a t i m e when rising interest rates, caused b y g r o w i n g demand for credit, together w i t h an increase i n the costs o f c o n s t r u c t i o n rendered more schemes marginal i n terms o f their p o t e n t i a l p r o f i t a b i l i t y . Thus, between 1960 and the early 1980s, significant relationships (at the 1 per cent level) are f o u n d t o exist between the supply o f credit i n the economy, as measured b y the scale o f t o t a l bank lending t o private domestic borrowers, and the scale o f b o t h industrial and office floorspace completed (Pearsons's r = 0.867 and Pearson's r = 0.794, respectively), and between the level o f associated bank lending t o c o n s t r u c t i o n and the scale o f industrial and office completions (Pearson's r = 0.783 and r = 0.673, respectively). However, the degree o f correlation between bank lending to construction and the scale o f completions was higher up t o the middle o f the 1970s. Thereafter, the increasing scale o f development activities and f o r w a r d fund­ ing o f schemes b y the investment i n s t i t u t i o n s together w i t h the expansion i n the role o f the non-associated banks, seems t o have been instrumental in depressing the degree o f association. I n the c o n t e x t o f the industrial property sector a further i m p o r t a n t relationship was f o u n d between the real value o f the I n d u s t r y and I n d u s t r i a l L o a n component o f the Public Capital Pro­ gramme and the scale o f b o t h the c o m p l e t i o n o f industrial space (r = 0.872) and the number o f i n d u s t r i a l units (r = 0.888) during the f o l l o w i n g year.

space, r = 0.690 for i n d u s t r i a l space) and the size o f the balance o f payments deficit (r = 0.566 for offices, r = 0.824 for i n d u s t r i a l space), findings w h i c h are reminiscent o f the research undertaken i n t o the relationship between capital flows and b u i l d i n g cycles i n nineteenth-century economies (Thomas, 1954). A n a d d i t i o n a l similarity t o t h a t b o d y o f w o r k is the tendency for the a m p l i t u d e o f i n d u s t r i a l b u i l d i n g cycles t o be far more accentuated t h a n those pertaining t o offices (see G o t t l i e b , 1976, p . 6 6 ) , as is the tendency for the industrial cycle t o lead o n commercial developments. I n D u b l i n the degree o f association between the t w o sectors is m a r k e d l y higher w h e n comparison is made between the annual o u t p u t o f office space and the previous year's level o f i n d u s t r i a l space c o m p l e t e d (r = 0.757, series 19601981 and 1 9 6 1

-1982). G o t t l i e b ( 1 9 7 6 , p . 70) explains this relationship between the cycles of the different p r o p e r t y sectors i n the f o l l o w i n g w a y :

I n d u s t r i a l b u i l d i n g provides the facilities w h i c h expand local jobs and p r o d u c t i o n and thus generates local commercial and residential expan­ sion.

However, the tendency for i n d u s t r i a l space t o lead over office completions may result rather f r o m the lengthier development t i m e scale associated w i t h office development. While i n d u s t r i a l space may be generated w i t h i n 12-18 m o n t h s o f i n i t i a t i o n o f new schemes, office developments are l i k e l y t o take a r o u n d t w i c e as long, being especially prone t o delays because o f problems over site assembly due t o t i t l e problems w i t h and m u l t i p l e ownership o f inner c i t y p o t e n t i a l redevelopment sites, as w e l l as difficulties over planning permissions and objections f r o m c o m m u n i t y groups.

V I I C O N S E Q U E N C E S O F T H E B O O M - S L U M P C Y C L E

industry's p r o f i t margins are therefore l i k e l y t o be squeezed. Those develop­ ments w h i c h are i n i t i a t e d earliest i n a p e r i o d o f rising demand i n the user market and i n w h i c h rental levels are increasing are n o t o n l y l i k e l y t o reach f r u i t i o n at a t i m e w h e n space is still scarce and c o m m a n d a p r e m i u m level o f i n i t i a l rent, b u t are also l i k e l y t o have benefited f r o m relatively l o w con­ s t r u c t i o n costs. I r o n i c a l l y , as construction companies recognise the p o t e n t i a l for gaining increasing shares o f development p r o f i t t h r o u g h raising tender prices, they u n w i t t i n g l y accelerate the onset o f the ensuing slump by increas­ ing the costs o f development and rendering more ventures p o t e n t i a l l y u n p r o f i t a b l e .

As the p u b l i c sector is a major source o f finance for the construction i n d u s t r y , financing over t w o - t h i r d s o f t o t a l o u t p u t , the scale o f the public sector programme has had a dramatic effect u p o n the general level o f con­ s t r u c t i o n a c t i v i t y i n the economy. U n f o r t u n a t e l y , as was n o t e d earlier, the scale o f the p u b l i c sector's capital programme tends t o parallel the level o f private sector a c t i v i t y rather than operate i n a counter-cyclical fashion. This exacerbates the problems associated w i t h the inherent tendency o f the i n d u s t r y t o experience periods o f over-heating f o l l o w e d b y periods o f severe depression. The consequences for the labour force have been particularly severe and d u r i n g the present slump are reflected i n an estimated 45 per cent u n e m p l o y m e n t rate among c o n s t r u c t i o n workers d u r i n g 1984. I n t u r n , the characteristic insecurity o f e m p l o y m e n t is l i k e l y t o c o n t r i b u t e t o problems w i t h respect t o labour relations i n the i n d u s t r y , w h i l e the chronic i n s t a b i l i t y i n the size o f the labour force makes i t d i f f i c u l t for the industry t o gear up t o service the requirements o f any subsequent u p t u r n i n demand for con­ s t r u c t i o n a c t i v i t y .

become " f r o z e n " awaiting an u p t u r n i n the development cycle fail t o enhance the desirability o f the inner c i t y as a residential environment. A t such times, those speculative schemes w h i c h are undertaken are generally c o n f i n e d t o the p r i m e areas. U n f o r t u n a t e l y , i n the D u b l i n c o n t e x t , this comprises the very areas i n w h i c h the b u i l t environment is already o f a high q u a l i t y .

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