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Office MarketBeat Report

Claro Cordero Jr. • 06/02/2024

PHILIPPINE ECONOMIC RECOVERY PROJECTED TO CONTINUE IN 2024

The Philippine economy grew by 5.6% in Q4 2024, bringing the full-year 2023 GDP growth rate to 5.6% due to better-than-expected growth in consumer spending and strong manufacturing output. Headline inflation rate further eased to 3.9% in December-2023, bringing thew 2023 average inflation rate to 6.0%, still higher than the 2.0% to 4.0% target of the BSP.

For 2024, the government projects the country’s economy to grow by 6.5% to 7.5% on back of the sustained remittance inflows from Overseas Filipino Workers, the expected increase in demand for IT-BPM sectors, and the continued recovery of the tourism sector. The country’s growth is expected to be driven by the slowdown in the pace of price gains, as further near-term cuts by the BSP remain distant while close monitoring of inflation expectations and second-round effects. The continued recovery of the local economy will be further supported by falling oil prices, as well as increased demand for Philippine exports as supply chain bottleneck continues to ease up, while supply-side concerns will be exacerbated by the ongoing strong El Nino and geopolitical and trade tensions.

METRO MANILA’S OFFICE VACANCY DECREASES IN Q4 2023

Overall Prime and Grade ‘A’ office vacancies decreased by 58-bps in Q4 2023, with the vacancy figure closing at 16.26% from the reported vacancy of 16.84% in Q3 2023. An absorption figure of roughly 0.11 million sqm of office space was recorded in the quarter, the highest recorded absorption figure since 4Q 2021, which brings the net absorption for 2023 to over 0.23 million sqm.

By end-Q4 2023, over 93,000 sqm of office space has been added to the supply bringing the overall stock of Prime and Grade ‘A’ office space in Metro Manila to roughly 9.5 million sqm. This brings the year-to-date completion for 2023 to roughly 0.34 million sqm, which is approximately 64% of the total projected completions for 2023. The improvement in the timing of development completions in the market is suggestive of the renewed leasing activity in the market.

However, overall vacancies in Metro Manila is projected to increase in the coming quarters due to the large volume of upcoming developments that are expected to be completed in the first half of 2024, as well as the effect of the implementation of the amendments to the CREATE Bill that will allow for companies belonging in the IT-BPM sector to implement more flexible work arrangements.

AVERAGE ASKING RENT MARGINALLY DECREASES IN Q4 2023

As office vacancies remain high in Metro Manila, majority of the landlords of Prime and Grade ‘A’ office spaces have kept their headline rates steady. However, some landlords have posted a slightly lower headline rent for their office spaces by end-Q4 2023, bringing the average asking rent of Prime and Grade ‘A’ office space to PHP 1,023 / sqm / month. This figure is a 1.8% decrease QoQ from the previous quarter’s rent of PHP 1,042 / sqm / month and a 1.5% decrease YoY from the reported rent of PHP 1,038 / sqm / month in the same quarter the previous year. Despite the decrease in headline rates, the continued increase in the net absorption figures is still indicative of the continued, albeit slow, recovery of the office real estate market in Metro Manila.

MARKET OUTLOOK:

 
  • Persistent global economic downturn – Despite inflation rates cooling down, global interest rates will remain elevated (even after approximating their peak levels). As a result, the return to pre-pandemic global demand for office spaces from traditional sources remains distant. On the other hand, demand for more outsourcing activities will stimulate occupier demand, albeit at a lower growth rate, which will likely improve the overall market vacancy rates in established CBDs
  • Government support sought to aid faster market recovery – The current confusion on the new legislation allowing remote work schemes must be clarified, as this will further stall expansion decisions of IT-BPM companies. These future growth plans will stimulate office space absorption in the local market.
  • Heightened demand for green developments – The demand for sustainable construction practices and property management is taking shape as large corporate occupiers simultaneously chart their long-term real estate strategies. The demand for high-quality developments will further highlight the demand for highly-flexible building systems and sustainable property management practices as effective ways to ensure healthy occupier demand while future-proofing commercial real estate developments.

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