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Metro Manila Office Market, One of Four in APAC Still Landlord-Friendly

Claro Cordero Jr. • 07/09/2020

Q2 2020 Net Rents Remain Unchanged from Q1 2020

 

Demand for Grade A office space has declined 45 per cent q-o-q in Asia Pacific, although it remains in positive territory, according to Cushman & Wakefield’s latest report Reclaim 2020: H2 Insights. Cost containment and capital preservation remain key strategies moving forward as regional net absorption continues to witness a decline. 

As at Q2 2020, just four markets, Manila, Bangkok, Ho Chi Minh City and Taipei in the Asia Pacific region remain landlord friendly, down from 11 at the start of the year and all four are reporting softening conditions.

Claro Cordero, Director, Research, Consulting & Advisory Services said, “While the level of transactions is significantly down, approximately 50 per cent of the pipeline supply amounting to around 450,000 sq.m. scheduled for completion within 2020 is expected to be delayed. Office developers and landlords have been very selective in providing rental concessions to tenants and outgoings remain generally the same. The biggest office space occupier – the IT and business process management (IT-BPM) sector – remained operating even during the strict lockdown period.”

Cushman & Wakefield Research notes that the lack of suitable office space in the medium-term, may artificially push up gross effective rents, which is already expected to be piled up with increased amount of outgoings attributed to additional expense in maintaining the health & safety standards in the office buildings. Q2 2020 net rents remain unchanged from Q1 2020 level at Php 1,028/sq.m. per month.

“In the medium-term, the expected new demand from IT-BPM firms is seen to benefit from the expected surge in global demand for outsourcing services by traditional companies, directly benefitting the Philippines as an offshore service destination,” Claro added.

The competitiveness of the local IT-BPM/outsourcing sector against other emerging markets, however, may be eroded due to lack of suitable office spaces in Metro Manila (specifically those with PEZA incentives), worsened by pandemic-induced delays in building completions. 

Higher rents may possibly displace other companies which have already been severely affected by the extended economic downturn.

If sustained by the steady source of highly-qualified labor pool, new mixed-use developments in secondary/sub-urban locations outside Metro Manila catering to IT-BPM firms may benefit from the foreseen expansion plans of IT-BPM firms.

Elsewhere in the region, landlord-friendly markets have turned more neutral and tenant-friendly and this has unfolded more rapidly than expected. 

Widespread rental decline can be seen across the region in Q2. While there are green shoots of emerging economic recovery, sectors such as office, retail and hotel will lag this recovery and likely continue to soften over the next six months. Total rental declines for the year are expected to range up to 15 per cent for markets that were already encountering headwinds prior to the pandemic. The vacancy outlook is much more nuanced, reflective of the wide range of conditions prevalent in each market, such as in Tokyo, as they entered the pandemic with a vacancy rate of less than two per cent, while vacancy rates in other markets like Malaysia, Jakarta and many China markets were over 20 per cent.

From a corporate occupier perspective, market uncertainty has led many non-business-critical decisions to be put on pause. New enquiries for space were down and regional net absorption has softened further from 10.1 million square feet in Q1 2020 to 6.9 million square feet in Q2 2020, which is 30 per cent of the three-year rolling quarterly average. 

Within this overall figure there are some brighter spots. Indian markets, specifically Hyderabad and Mumbai, recorded 3.7 million square feet of positive net absorption in Q2, albeit this was a 50 per cent decline q-o-q and the softest result since 2013. On a brighter note, Tier 1 markets in China returned to positive net absorption after a particularly soft first quarter. While these may only be considered mildly positive, they stand in stark contrast against the almost 22.8 million square feet of negative net absorption recorded across US markets, further highlighting the resilience of the region so far.

Metro Manila Office Market, One of Four in APAC Still Landlord-Friendly

“The impacts of COVID-19 have been swift and dramatic, with further downside risks likely to echo for some time yet. However, just as boom cycles come to an end, so too do bust cycles. There are green shoots of economic recovery already emerging across the region. The outlook for different markets will look different as it is tied very closely to their ability to keep the virus contained,” said Dr. Dominic Brown, Head of Insight & Analysis, Asia Pacific at Cushman & Wakefield. “The speed at which market changes occur will therefore vary, requiring a proactive and flexible approach from both occupiers and investors alike.”

Overall, space needs are evolving, driven by cost reduction and greater employee flexibility. The speed at which these workplace strategies can be deployed is dependent on several factors, but ultimately require the alignment of financial goals with corporate real estate strategy, HR policies and change management practices. The corporate strategies put in place will be key in driving market outlook, and this will continue to play out over 2021 and beyond. 

Reclaim 2020: H2 Insights
highlights the impact of the COVID-19 pandemic in Asia Pacific and the progress of recovery. The report discusses where green shoots of opportunity are emerging, and further insights to how investors, landlords and tenants should make real estate decisions in this environment. Click here to download the report.