Office vacancy rate balloons to Global Financial Crisis level as space vacated outweighs take- up
The overall office vacancy at the end of Q3 2021 stood at 14.4%, approximating the vacancy rate level estimated in Q4 2009, widely-considered as the bottom of the real estate market down cycle precipitated by the Global Financial Crisis. Unoccupied spaces in developments completed within Q1 2021 to Q3 2021 alone in Metro Manila accounted for 22% of the total vacancies during the quarter.
The vacancy rate is anticipated to swell further as the amount of space vacated by major tenants still outweigh the total space taken up in the market. The exit of offshore gaming operators continues to drive the increase in vacant spaces in Metro Manila. Pasay City, where majority of the offshore gaming operators were located, has over 62,000 sq.m. of office spaces that have been vacated.
Net absorption in Q3 2021 reached -40,000 sq.m. bringing up the running annual total to -140,000 sq.m. as of end Q3 2021.
Average Asking Rent Continues Downward Trajectory
Average prime and Grade ‘A’ asking rent in Metro Manila closed at PHP 1,047/sq.m./mo., a decline of 1.8% QoQ and 3.3% YoY. More developers made further downward adjustment in the published rates for some developments in Metro Manila. Average rents in established CBDs such as Makati and BG were more resilient, as majority of the developments which exhibited huge spike in vacancy rates were in the emerging business districts.
Demand for Office Space Seen to Recover Over the Long-term
In the short-term, one of the downside market risks will be the escalating vacancies, as firms remain cautious and may even be forced to right-size their space requirements. Over the long-term, however, office space demand is expected to normalize as space density expands to address prescribed health protocols amidst the blended or hybrid – i.e., partly working in the office and partly working from home – workforce arrangement.
Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “The overall vacancy rate in Metro Manila is almost similar to levels last seen during the Global Financial Crisis, and is expected to even breach the all-time high figure recorded 12 years ago. Some major markets are even demonstrating over 25% vacancies already as offshore gaming companies continue to return large amounts of office spaces, as well as the unoccupied additional spaces in newly-completed office buildings. Demand from the BPO sector will hopefully start filling in spaces again as early as the middle of next year, with a number of prospects particularly interested in taking up fitted spaces vacated due to the pandemic.”
Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield, said, “The delayed resumption of full business activities continues to push the vacancy rate in the office sub-sector upwards while the average asking rate modestly declined as major office space operators - primarily in the CBDs - hold onto their pre-pandemic asking rents. Leasing activities are seen to remain tamed in the short- to medium term as the stricter and more refined taxation rules for the Philippine offshore gaming operator (POGO) industry are likely to drive away some gaming operators, leaving the resurgence of the office property segment to be primarily influenced by the resumption of the expansion plans of the information technology and business process management (IT-BPM) industry.
Signs of Uneven Recovery Across Other Real Estate Sub-Sectors
As the pandemic wears on, demand shift from residential condominiums in densely populated business districts to medium-priced properties in self-sustaining communities in the periphery areas of Metro Manila will continue to be observed. C&W Research, however, noted that several major developers are already lining up new launches for vertical residential developments, in anticipation of the demand recovery in the medium-term.
Also, budget accommodations and extended stays hotels are seen to benefit from the improved travel appetite following the less stringent regulation on domestic travel as well as the flexible work arrangements that allow remote working from tourist destinations.
The ongoing restrictions will continue to drive a number of traditional retailers to different e-commerce platforms, as a way to drive sales amid the challenges of the pandemic. The transition to online space and uncertain business environment will contribute to the burgeoning retail vacancies as retailers – both existing and new entrants – remain cautious on their space requirements.
Meanwhile, the industrial sub-sector resiliency is to be further boosted by the recovery of the manufacturing and international trade activities, in addition to the heightened activities from e-commerce and other fast-moving consumer goods companies, which augment the demand for modernized warehouses and cold-storage facilities.
The Looming Restrictive Monetary Policy Adjustments to Further Compress Market Yield Rates
Estimated average office (gross) rental yields in Q3 2021 remained at 6.3%. Year-on-year (YoY), the rental yields declined by about 40 basis points from their level in Q3 2020. As the global economy recovers, the consequent restrictive monetary policy adjustments will further compress the average yield rates in the market. Further, C&W Research estimates that capital value growth will be tempered initially in the core markets (i.e., major CBDs) in Metro Manila. On the other hand, this will reignite the interest for long-delayed capital market transactions, which were halted due to the COVID-19 pandemic.
Mr. Cordero added, “The global spread of the highly-contagious COVID-19 Delta variant also severely affected the economic performance of various Southeast Asian countries, prompting lower economic forecast in the region. While slower economic growth is projected by end-2021, recovery is expected by 2022 provided the recurring spike in the number of infections - due to the slow roll-out and highly-uneven inoculation program across the region - is effectively managed.
“Corporates are advised to revisit their respective workplace strategy to firm up and identify future real estate requirements to take advantage of the flexibility being offered by several landlords and operators. Corporate occupiers need to work on planning the long-term occupancy trends that will be able to attract/inspire the employees and the talents to move back to the physical office spaces”, Mr. Cordero further added.
Meanwhile, investment opportunities that will leverage on the accelerated digital transformation with the prevalence of the hybrid work arrangement and the growing online economy are among the bright spots in the short- to medium-term.