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Q1 2024 Philippine Office & Investment MarketBeat Reports

Claro Cordero Jr. • 24/05/2024
  • Varied and complex growth opportunities abound in key real estate segments
  • The “higher-for-longer” interest rate regime coupled with sticky inflation effects on property market fundamentals will exert downward push on property values in the short- to medium-term.
  • Focus on sustainability and green building practices is affecting the commercial real estate market by reshaping tenant preferences

Whilst no new office space completions were recorded, overall vacancies in Prime and Grade 'A' office spaces in Metro Manila soared by 26 basis points in Q1 2024 to 16.53%, compared to 16.26% in the previous quarter. Office take-up slowed down in Q1 2024, resulting in a negative net absorption of roughly 25,000 sq.m.

Total supply is expected to increase by 0.44 million sq.m. in Q2 2024; however, completion delays are imminent. Vacancy rates are expected to remain within the 15%-20% range in the near- to medium-term due to the compounded volume of new completions, aggravated by the return of spaces from right-sizing initiatives of key occupiers and deferred expansion decisions of several IT-BPM companies.

Overall Rental Rate Dips as Asking Rates for Office Space in Fringe Areas Decline

Due to elevated vacancy rates, several office developments, especially in fringe locations, are being offered at lower rates, reversing the upward growth trend of the overall average asking rates of Prime and Grade 'A' developments in Metro Manila. Average rents settled at PHP 1,012 per sq.m. per month, a 1.06% decline from PHP 1,023 per sq.m. per month in the previous quarter. Despite the observed decline in headline rent, the majority of Prime and Grade ‘A’ developments in major CBDs are expected to keep their asking rates steady, notwithstanding the persisting high vacancies in the medium term.

Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “Despite the setback in overall market vacancies, we are optimistic that the commercial real estate market in Metro Manila will continue its recovery, albeit at a slower pace, for the remainder of 2024. On the other hand, average asking rents further lowered to PHP 1,012/sq.m./month from PHP 1,023/sq.m./month as high market and building vacancy rates prevail. With the impending passing of the proposed amendments to the CREATE BILL, overall vacancies are bound to be affected in the medium term. On the other hand, major Prime and Grade ‘A’ developments with ‘green’ certifications and established sustainability practices are bound to register lower vacancies, as sustainability becomes more highlighted in the real estate requirements of multinational companies.”

Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield said, “Sustainability is now a primary consideration of multinational companies in setting up their office spaces. The focus on sustainability and green building practices is affecting the commercial real estate market by reshaping tenant preferences, as well as adjusting investment strategies of key financiers. The rental rates in high-quality developments are likely to remain competitive and will remain within the investment radar in the Manila commercial real estate market.”

“Aside from this opportunity, office space take-up may be further boosted by the demand coming from several key government institutions as they prepare for a refresh of their respective headquarter offices, in view of the thrust of the government to promote modern yet inclusive and laden with sustainable and environment-friendly features and technologies,” Mr. Cordero mentioned.

Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield said, “Despite these opportunities, the expansion strategy of traditional corporate occupiers remains varied. Aside from expansion delays, some global technology companies have been returning office space in the market, as global employee layoffs continue in view of protecting their respective bottom lines due to the rise in research & development (R&D) costs, as high demand for further advancements in artificial intelligence (AI) and high financing rates remain,” Mr. Cordero added.

Expansion Demand to be Hampered by Persisting Local and Global Uncertainties

Moreover, amidst the prevailing tight financial market conditions, the favorable economic growth prospects should encourage foreign investment inflows in the manufacturing industry, to further buoy activities in the country’s industrial estates and the warehousing segment. However, new stress items on the global supply chain such as the heightened situation in the West Philippine Sea and the South China Sea (across various countries), the recent Red Sea attacks on private shipment companies, the ongoing microchip shortage and concerns on growth of labor sources, may delay the flow of growth opportunities into the sector.

Mr. Cordero further added, “Whilst foot traffic in shopping malls has exceeded pre-pandemic levels, the local and global uncertainties continue to impact retailers' demand for space, leading to an overall high vacancy and tamer rental rate increases. In the medium-term, however, as the market conditions further stabilize, new opportunities for local and global locators are likely to grow. This early, developers have ventured into reinvention plans for existing developments in a bid to foster a more cohesive customer experience once the essential demand conditions fully recover.”

The continued bifurcation between the high-end and mid-end market will continue to grow in the various segments. The mid-end residential condominium market will continue to be hampered by the prevailing high borrowing cost and prices. In the medium-term, however, the respite from supply growth will facilitate take-up of existing excess inventory. On the other hand, the focus on premium housing developments by major developers will assist in unraveling new areas for development.

In the hotel segment, the fast-tracked recovery will hinge on the recovery of travel demand from key source markets such as China, although domestic travel demand is seen to continue to drive the travel and accommodations industry.

“Higher-for-Longer” Interest Rate and Sticky Inflation Exert Downward Push on Property Values

Estimated average office (gross) rental yields in Q1 2024 increased to 6.85% from its Q4 2023 level at 6.80%. Year-on-year (YoY), however, the rental yields declined by about 5 bps from its level in Q1 2023. As global interest rates have not declined as anticipated, C&W Research estimates gross rental yields for the Manila market to continue its upward movement in the near-term.

Mr. Cordero mentioned, “The ‘higher-for-longer’ interest rate regime coupled with sticky inflation effects on property market fundamentals (foremost of which is the office market yields) are going to exert downward push on property values in the short- to medium-term. Rationalization of property values will likely unlock new transactions and will move the stock inventory of strategic assets that are ripe for redevelopment. On the other hand, higher financing costs, as a result, will adversely affect the demand for mid-end products.”

Developers have started to shift their focus on the premium segments, owing to its highly resilient nature from intermittent economic shocks. The shift towards the high-end property segment will also shift back the investment interest towards the major CBDs and new areas with premium amenities and future-proof development features,” Mr. Cordero said.

“Nevertheless, the efforts to promote and ensure a competitive investment climate through policy reforms will assist investors in exploring for investment opportunities in the Philippine property market, focused on the bright prospects of the emerging asset classes such as data centers, flexible workspace and international-grade logistics/warehousing facilities,” Mr. Cordero further added.


About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in nearly 400 offices and 60 countries. In 2024, the firm reported revenue of $9.4 billion across its core service lines of Services, Leasing, Capital markets, and Valuation and other. Built around the belief that Better never settles, the firm receives numerous industry and business accolades for its award-winning culture. For additional information, visit www.cushmanwakefield.com.

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