Average office vacancy rate sets a new high as fresh office space supply entered the market and as tenants continued to exit
Approximately 182,000 sq.m. of new office spaces were completed within Q1 2022, resulting to existing consolidated Prime and Grade ‘A’ office supply of around 9.1 million sq.m. Due to new supply completion and continued exits from key tenants, the overall vacancy rate grew to 15.8%, surpassing the previous record-high vacancy rate of 14.5% in 2009. While the net absorption figure for Q1 2022 remained positive, occupier exits still occurred in the quarter, most notably from the offshore gaming sector which returned at least 47,000 sq.m. of office space. With almost 600,000 sq.m. of supply pipeline expected within the remainder of 2022, vacancy rate is expected to further swell in the absence of new major transactions.
The Information Technology and Business Process Management (IT-BPM) sector remains as the biggest source of office demand. However, the mandate of 100% on-site reporting for companies registered with investment promotion agencies such as the Philippine Economic Zone Authority (PEZA) and the Board of Investments may likely trigger prospects to shift focus to other countries that are supportive of flexible work arrangements. In its most recent announcement, PEZA has allowed registered business entities (RBEs) to apply for 30% of its operations to work outside of their designated special economic zones until the end of the State of National Calamity albeit a possible reduction in incentives that RBEs enjoy.
Rental Growth Improved by 0.3% Quarter-on-Quarter but Declined by 2.4% Year-on-Year
Average Prime and Grade ‘A’ office rents in Metro Manila closed at PHP 1,045/sq.m./mo., a slight growth of 0.3% quarter-on-quarter, signaling that landlords and developers are anticipating the eventual recovery of market demand. On a year-on-year basis, this is still a decline of 2.4%, slower than the 3.1% contraction in Q4 2021, confirming Metro Manila’s position in the recovery phase of the market cycle. The Q1 2022 rental figure is also 3.6% lower than the PHP 1,084 recorded in Q1 2020, just before the average rental figure started declining.
Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “Landlords and developers are attempting to return asking rents to pre-pandemic levels as they regain confidence that demand has started to recover following the easing of restrictions, as well as the mandate for full return-to-office for certain companies. But as vacancy remains inflated, potential tenants are still likely to enjoy a wider room to negotiate better terms.”
The return-to-office mandate to entities registered with investment promotion agencies such as the Philippine Economic Zone Authority as Metro Manila and more parts of the country shifts to Alert Level 1 has created a ruckus, especially among the companies and their employees who have thrived in the implementation of work- from-home arrangements at height of the crisis. Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield said, “As hybrid work set-up is seen to transcend the pandemic in many markets, the office property sub-sector could benefit from the development of optimal agile working policies, comparable to other markets in the region, to safeguard its position in the highly competitive IT-BPM industry.”
Mr. Cordero further said, “Brighter prospects are also anticipated for the other property sub-sectors. With the increase in activities in the major CBDs as companies are now encouraged to recall their employees back to offices, residential demand in these districts, particularly for residential condominiums, is gaining traction as well. The segment will see an incessant expansion, especially in the provincial areas, with the continued infrastructure improvements. New supply pipeline of residential developments is also expected to gain traction as demand for sustainable and pandemic-proof features/amenities increases.”
Foot traffic in retail establishments has significantly increased as mobility restrictions were lifted, and consumers unleash accumulated savings over the last two years. With signs of economic resurgence becoming more apparent, retail vacancies are seen to taper off in the mid-term. Nonetheless, retail space new supply will continue to fall behind other real estate sub-sectors with minimal project launches in the market.
The increased vaccination rate gradually calms travel hesitancy, and the major tourist destinations are benefiting from the surge in visitor arrivals, despite still being mostly domestic travelers. Hotel establishments are expected to see improved occupancy rates as domestic and international travel restrictions are eased, with the country reopening to foreign tourists in February.
Meanwhile, the nearby provinces in Metro Manila continue to embolden the growth of logistics facilities and industrial estates, with e-commerce as its primary driver. The manufacturing and external trade segments, however, remain vulnerable as the rising commodity prices globally, and the supply chain bottlenecks present new threats.
The Anticipated Monetary Policy Normalization to Repress Yields in the Short- to Medium-term
Estimated average office (gross) rental yields in Q1 2022 compressed further to 6.20%. Year-on-year (YoY), the rental yields declined by about 30 basis points from its level in Q1 2021. C&W Research estimates rental yields to remain flat in the short- to medium-term, as the Bangko Sentral ng Pilipinas (BSP) may consider an interest rate hike towards the end of Q2 2022, as inflationary pressures remain due to external shocks to global commodity prices and supply chain disruptions.
Mr. Cordero added, “Investor sentiment is seen to improve on the back of better market conditions arising from the further reopening of the economy despite downside risks brought about by rising inflation and imminent interest rate hike. Acquisition of quality commercial assets in key central business districts is also seen to accelerate before the market cycle turns into full recovery while office occupiers are expected to lock in favorable long-term deals before office fundamentals fully recover.”
“Specialized assets such as digital infrastructures, as well as green developments are expected to attract investors, as the global trends shift focus toward sustainability and environmental efficiency. In the property sector, capital infusions are expected to be directed on more resilient segments such as industrial and logistics and residential, as well as land banking in areas with an infrastructure development focus”, Mr. Cordero said.