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Q1 2021 Philippine Office & Investment MarketBeat Reports

Claro Cordero Jr. • 23/04/2021
The impacts of offshore gaming departure and the rise of blended work environment pushed office vacancy rate to a record 10.7%, the worst since the Global Financial Crisis period

Overall Metro Manila Prime and Grade ‘A’ office vacancy rate grew by 290 basis points (bps) quarter-on-quarter (QoQ) and 710 bps year-on-year (YoY) to 10.7% in the first quarter of 2021. This is the first double-digit vacancy rate recorded after the 14.5% figure in 2009 as an effect of the Global Financial Crisis (GFC). The exit of several offshore gaming companies and workspace rationalization of several companies as the work-from-home (WFH) set-up continues, coupled with new supply completions within the quarter, have contributed to the growth in vacancy rates. Pre-commitment has been observed to be lower than historical average in the various office projects completed in Q1 2021. Approximately 65.6% of the 203,000 sq.m. new supply in the first quarter remains available in the market.

Average Rents Recorded Its First-ever Decline as the Office Sub-sector Transitions From Landlord-favorable to Tenant-favorable Territory

The office sub-sector in Metro Manila officially crosses to tenant-favorable territory with the first YoY decline since 2009, with a slight contraction of 1.2% YoY to PHP 1,070/sq.m./mo – which is also 0.4% lower than the quarter-ago value of PHP 1,074/sq.m./mo.

While offer rents in most Prime and Grade ‘A’ developments in Makati CBD and BGC remained unchanged since its year-ago levels, several landlords and developers have started to offer more flexibility in rent negotiations.

Demand for Office Space Expected to Grow at a Slower Pace Than Supply

The inability to operate at full capacity suppresses the demand for additional office space, especially with the availability of other viable solutions such as flexible working arrangements.

Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “While the office sector is relatively less impacted from the effects of the pandemic as compared to other property classes, it is not completely shielded from it. We are seeing restructuring and changes in the real estate strategies of multinational companies materializing this year largely due to the continued implementation of remote work arrangement as it remains unclear when we can safely return to the office, as manifested by the recent surge in new cases. This uncertainty is also causing new entrants and expansion projects to continue putting their plans on hold until the local COVID situation gets better.”

Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield, said, “Looking at each property sub-sector, active expansion of industrial footprint is currently being undertaken by major industrial players in response to the bright prospects of the sub-sector which is seen to lead the property sector in the short to medium term. Moreover, the new CREATE law is expected to assist the manufacturing and electronics industries, which occupy the majority of the country’s industrial hub, to gain momentum as well as encourage future expansions and new investments with the more favorable fiscal incentive schemes. Mergers and consolidation are expected among small- to mid-scale players to improve operational efficiency.”

Meanwhile, house and lot developments in urban areas remain as an attractive residential option as compared to residential condominiums in major business centers with the latter exhibiting price softening that is expected to persist in the short to medium term. Residential condominium developments with superior property management and less dense population are expected to remain attractive in the market.

The lingering economic uncertainties, reinforced with the high level of prices and joblessness, hamper the growth momentum of consumer spending and dims the immediate recovery of the retail sub-sector. Retail players are compelled to incorporate contactless solutions and e-commerce options in their long-term strategies as the country anticipates the success of the inoculation drive. The renewed restrictions on non-essential travel also present another hurdle to the tourism and accommodation industry which banks on the resurgence of domestic tourism to restart the hospitality sub-sector which has yet to recover from the pandemic-induced financial stress.

CREATE Law to Boost Investor Confidence

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) law which reduces the country's corporate income tax rate to a more competitive level is expected to improve investor confidence and serve as a major stimulus in attracting investments that will create more jobs and support faster economic recovery.

Significant transactions are expected in the near- to medium-term, as property yields and values move toward realistic levels. Office (gross) rental yield in the investment-grade office market in Q1 2021 contracted further to 6.5%. Year-on-year, the rental yields declined by about 40 basis points from its level in Q1 2020.

Mr. Cordero added, “In core cities within Metro Manila, urban renewal opportunities are likely as new infrastructure developments are being completed, further supporting the movement of corporate occupiers and workers towards less dense communities.”