Overall vacancy declines for the first time since the start of the pandemic; office rental growth remains lull
Overall Grade ‘A’ office vacancy rate in Metro Manila closed at 16.1% at the end of Q3 2022, albeit only 10 basis-point decrease quarter-on-quarter (q-o-q). This is the first time the average vacancy rate declined, after maintaining a positive trajectory since Q1 2020. While this figure is still 190 bps higher year-on year (Y-o-Y) compared to the estimated vacancy rates in Q3 2021, this q-o-q improvement shows that demand is slowly recovering. A positive net absorption of 38,000 sq.m. was recorded this quarter, an improvement from the -37,000 sq.m. in Q2 2022, resulting in a year-to-date net absorption figure of roughly 32,000 sq.m.
Average Rent Posted Slight Q-O-Q Growth
Average asking rents in Metro Manila closed at PHP 1,038/sq.m./mo by end-Q3 2022, a growth of 0.1% q-o-q. While this is still a 0.8% contraction (Y-o-Y) from the monthly rate of PHP 1,046 per sq.m., the contraction is slower than the -2.7% Y-o-Y contraction recorded in Q2 2022, suggesting marked overall improvement in market take-up.
Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “Market activity continues to improve as even the mask-wearing mandate having been eased in Q3 2022. While there are still potential rightsizing initiatives from companies who are still working on their workplace strategies, we can expect some considerable take-up from new entrants in the next couple of quarters. Market fundamentals are slowly improving, and we are enthusiastic that this trend will continue as we enter 2023.”
Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield said, “Many corporate occupiers remain unsure about their future office needs – hence, a mix of real estate strategies are in the offing. Future occupational strategies have been a mix of less space allocation per worker and an overall increase in occupancy cost due to upgrades into office space serving multiple purposes with the objective of attracting the employees back to the office.”
With the advent of hybrid work practices, several companies may consider operating in multi-sites, which may mitigate higher occupancy costs and wages due to elevated inflation rates. This scenario bodes well for the continued growth and expansion of the IT-BPM and outsourcing industries, which will likely fuel growth in office space demand in the medium-term.
Mr. Cordero further added, “While the pending imposition of the Philippine offshore gaming operators (POGOs) ban will (when it happens) drag rents down, the recovery of office space demand from IT-BPM companies (coupled with still expected delays in supply completion) will soften the downfall and eventually reverse the direction (to growth) in the short-term. The POGOs have been exiting the market since early 2020 and have caused rents to go down by as much as 4.0%, on average, over the last seven (7) quarters. While the industry may have occupied more than 1.0 million sq.m. of (primarily non-CBD Grade ‘B/C’) office space at its peak, the real estate footprint of the industry has significantly gone down to less than half by Q3 2022.”
Major retail establishments are now recording foot traffic of more than 80% of pre-COVID levels, boosted by the return of face-to-face classes in the country. Notwithstanding the unfavorable macroeconomic situations which include elevated inflation, retail sales are seen to improve during the remainder of 2022 as footfall and consumer spending surge during the holiday season.
Also, the recently completed and anticipated infrastructure developments are seen to fuel the vibrancy of the industrial segment in the CALABA corridor, and in Pampanga and Tarlac in Central Luzon. Greater demand for developable land in these areas boosts the capital value of industrial assets whilst the expansion of the logistics and warehousing segments continues to match the demand from manufacturing and exports, in addition to demand from the e-commerce industry.
The travel and tourism industry also exhibits gradual recovery as evidenced by the increasing air passenger traffic volume. Domestic travel remains the main driver of tourism activities while international travel remains highly susceptible to global economic volatilities despite the eased documentary and border restrictions for foreign travelers.
Whilst OF remittances inflow is seen to increase in the upcoming periods, the residential demand is likely to have a little boost from this inflow as funds are likely to be directed to essential items, other than for residential property purchase. The volatile environment of rising inflation and interest rates is seen to stifle pent-up demand (from the “wealth effect” due to the Philippine peso depreciation against the US dollar) for affordable to mid-market residential segments in the medium-term.
Despite the External Headwinds, Revenge Spending and Domestic Travel Amidst the Sustained Easing of Pandemic Restrictions Will Buoy Recovery Path
Estimated average office (gross) rental yields in Q3 2022 stood at 6.20%. Year-on-year (YoY), the rental yields declined by about 10 basis points from its level in Q3 2021. C&W Research estimates rental yields to inch up in the short-term, due to several adjustments in the key policy rate hike since the start of Q3 2022.”
Mr. Cordero further added, “The concurrent contractionary monetary policy stance among economies amidst growing uncertainties may dim the global recovery outlook which could defer investment decisions among local and global locators in the short- to medium-term.
Whilst external headwinds pose a greater challenge to the sustained improvement in economic and business conditions, the prospects of revenge spending and domestic travel amidst the sustained easing of pandemic restrictions will likely buoy the path (despite having slowed down significantly) towards return to pre-pandemic economic growth levels.
“Inflationary pressures will delay investment decisions in the short-term to build high-spec properties due to higher construction cost materials and the continued supply chain challenges. In the long-run, however, taking on development risks and pursuing joint ventures with established developers and construction firms will mitigate construction cost risk. The rental rates of existing prime commercial and logistics properties are poised to achieve resilient growth due to lower operating costs (due to sustainability features) and persistent flight-to-quality demand. As a result, this will further drive-up obsolescence risk, putting greater pressure for ageing and energy-inefficient developments to undergo asset enhancement and redevelopment.”, Mr. Cordero said.