Vacancy rates expected to trend downwards in 2023; demand from the IT-BPM industries expected to increase despite global economic headwinds
Average vacancy rates marginally increased to 16.13% in Q4 2022 from 16.12% in Q3 2022, as average rental rates similarly registered a slight softening of 0.16% quarter-on-quarter (q-o-q) in Q4 2022 primarily due to the volume of new stock completions. On a year-on-year (y-o-y) basis, average Prime & Grade A rents in Metro Manila declined by 0.51%, despite a 0.4% y-o-y growth in net absorption in 2022. Total completions in 2022 were recorded at 0.34 million sq.m., roughly 43% of the expected completions estimated at the beginning of the year. The estimated total Prime and Grade ‘A’ office supply in Metro Manila now stands at approximately 9.2 million sq.m. and is expected to grow by another 0.53 million sq.m. within 2023. The continued flight-to-quality and availability of higher grade office developments will drive vacancy rates downwards to 15% by end-2023.
Demand Growth Amidst Challenging Environment
Despite the several global economic headwinds ahead, the Philippine IT-BPM industry is expected to significantly benefit from large-scale lay-offs in tech companies. Mass job cuts among tech and start-up companies have driven the demand for outsourcing and IT-BPM related industries in order to further save up on operating costs amidst the challenging business environment. As demand starts to recover, average Prime and Grade ‘A’ rents are estimated to grow at a base scenario between 1.5%-2.0% in 2023.
Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “While market recovery continues in Q4 2022, we still see a possibility of a slight increase in average vacancy rates from the previous quarter, as well as a slight dip in asking rents, primarily due to the addition of new stocks from new building completions as well as non-renewal or early return of space by occupiers continuing their exercise of right-sizing or converting to a hybrid set-up. Nonetheless, overall vacancy rate for Metro Manila is forecasted to go down in 2023 partly due to the rekindled interest of multi-national companies looking at setting up back-office or shared services operations in the country.”
Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield said, “The recovery of the office market remains on track whilst a handful of buildings post slight downward rental adjustments, although rental flexibility is dependent on the amount of space to be taken in by the prospective tenant. Positive rental growth is likely to happen in 2023 as delayed prospects are expected to get a green light this year, giving confidence to developers and landlords to test resistance levels on the pre-pandemic published rates, while overall market vacancy tapers down.”
“Allowing liberal work-from-home (WFH) arrangements for IT-BPM companies registered with the Board of Investments (BOI) will favor further growth of flex spaces. A “hub-and-spoke” strategy will likely increase the demand for “plug-and-play” office spaces which are readily-available on short notice and with flexible terms.”, Mr Cordero added.
Meanwhile, revenge spending has buoyed the retail segment in 2022 with footfall in key establishments reverting close to the pre-COVID-19 level in the latter part of the year. The more stable labor market and the increase in disposable income as the second tranche of the tax cut takes effect will soften the negative impact of elevated price hikes.
The other property segments are also seen to exhibit better performance. The strong growth trajectory of the industrial and logistic segment is buoyed by the expansion of the country’s online economy, as e-commerce remains a popular channel among consumers. The upward trend in domestic manufacturing is also seen to improve demand for standard factory buildings (SFBs) from traditional locators.
Mr. Cordero further added, “Demand for residential condominiums in key business districts is slowly reverting to a positive trend as business activities have begun to normalize. Movements in completion dates were made for several projects during the pandemic due to subdued demand in the last two years. Whilst the higher interest rates are likely to have little effect on the high-end residential segment, greater impacts are likely to be observed in the mid-market residential segment in the medium term.”
A more optimistic outlook is expected for the hospitality segment amidst the anticipated increase in domestic and international travelers. Nonetheless, the effects of geopolitical and global market instabilities remain a top concern that could quickly dent the segment’s recovery pace, signaling the delay in the recovery of international tourist arrivals.
Amidst External Headwinds, Revenge Spending, Domestic Travel, and Sustained Easing of Pandemic Restrictions Will Buoy Recovery Path
Estimated average office (gross) rental yields in Q4 2022 inched up by 5 bps from its Q3 2022 level to settle at 6.25%. Year-on-year, the rental yields declined by about 2 bps from its level in Q4 2021. C&W Research estimates rental yields to further inch up in the short-term, due to several adjustments in the key policy rate hike within Q4 2022 and expected adjustments within Q1 2023.
Mr. Cordero mentioned, “The growing gig economy in other markets can answer to the demand of companies in keeping overall overhead costs low amidst the global economic headwinds and massive lay-offs in tech companies.
With aggressive efforts through upskilling and reskilling the labor force and implementing favorable business policies, the gig economy, however, may pose a potential indirect threat to the growth of the local outsourcing industry.”
Mr. Cordero further added, “Adjustments in policy interest rates by BSP remain dependent on the global economic outlook, as well as taming inflation and strengthening the weakened level of the Philippine peso. Nonetheless, domestic demand is seen to continually fuel growth, boosted by the implementation of the income tax breaks under the second tranche of the Tax Reform for Acceleration and Inclusion (TRAIN) law which will affect the spending of low and middle-income households.”
“Inflationary pressures and the expected global slowdown will continue to delay occupancy and real estate investment decisions. As many corporate occupiers remain unsure about their future office needs coupled with the advent of hybrid work practices, the growth of office space demand and other allied property sectors will thread below pre-pandemic levels. The sub-par demand growth will be more distributed as new emerging urban districts outside the main CBDs in the Manila market continue to gain traction due to decisions of several companies to operate in multi-sites through flexible workspaces and marginally increasing demand for residential developments”, according to Mr. Cordero.
“The growth of new asset classes such as data centers and high-grade logistics facilities will continue to pick up investor interest. In lieu of this growth, several policy enhancements centered on Environment, Social Relevance and Good Corporate Governance (ESG) initiatives need to be instituted to support the sustainable growth of these nascent real estate sub-sectors.”, Mr. Cordero said.