PHILIPPINE ECONOMIC GROWTH RESILIENT IN Q1 2024 DESPITE FALLING BELOW EXPECTATIONS
The Philippine GDP grew by 5.7% in Q1 2024 – lower than the 6.4% growth rate a year ago but higher than the revised 5.5% figure for Q4 2023. The persistent high inflation and interest rates, as well as the moderate growth in demand influenced by the impact of the heat wave.
Headline inflation rate increased to 3.7% in March 2024, bringing the overall inflation rate of the country to 3.3% for Q1 2024, significantly lower than the 8.3% level recorded in the same quarter the previous year. Despite the uptrend of headline inflation in March from the reported inflation rate of 2.8% in January 2024, the overall inflation of the country still falls within the Central Bank’s forecast of 2% to 4% for the year.
On the other hand, the country’s unemployment rate declined to 3.5% in February 2024 from the reported rate of 4.5% in January. The lowered unemployment rate was due to the increased employment opportunities from the wholesale and retail trade due to the opening of classes and the favorable weather conditions allowing agricultural growth produce earlier in the year.
The government has previously lowered GDP growth rate for 2024 to 6%-7% from 6.5%-7.5% amidst ongoing strong El Nino and prevailing geopolitical and trade tensions. Despite the slower growth rate projection, the planned modernization and enhancement in the efficiency of the Philippine tax system is envisioned to strengthen the robust macroeconomic fundamentals to fortify its position as one of the fastest-growing emerging economies in the Asia-Pacific region in the medium-term.
METRO MANILA’S OFFICE VACANCY INCREASES IN Q1 2024
Whilst no new office space completions were recorded, overall vacancies in Prime and Grade 'A' office spaces in Metro Manila soared by 26-bps in Q1 2024 to 16.53%, as compared to a vacancy of 16.26% in the previous quarter. Office take-up has 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% levels in the near- to medium-term due to the compounded volume of new completions, aggravated by the deferred expansion decisions of several IT-BPM companies due to the impending finalization of the amendments to the CREATE MORE Bill.
OVERALL RENTAL RATE DIPS AS ASKING RATES FOR OFFICE SPACE IN FRINGE AREAS DECLINE
Due to elevated vacancy rates, a number of office space developments, especially in fringe locations, are being offered at lower asking rates, eventually dragging the average asking rates of Prime and Grade 'A' developments in Metro Manila at PHP 1,012 per sq.m. per month, a 1.06% decline from an average of 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.
MARKET OUTLOOK
- Rough patch towards recovery of office space absorption: the expansion strategy of corporate occupiers remains varied. Aside from delays in the expansion decision of IT-BPM firms, some global technology companies have been returning office spaces 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.
- Shorter-term contracts: occupiers continue to review pre-commitment items, particularly, the duration of the lease term. Interest rate movement has become a key consideration, as high cost of financing for office fit-outs and future capital expenditures prevents them from signing long-term commitment contracts.
- Office space upgrades for government institutions: 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.
- Heightened focus on sustainability and green developments to drive office take-up: 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.
