Stronger absorption rates and further office development completion delays to drive recovery of rental rates and stable vacancy rates for the rest of 2023 amidst resurfacing of older risk sets
Overall Grade ‘A’ office vacancy rate in Metro Manila closed at 16.16% at the end of Q1 2023, which is a 21 bps increase q-o-q from 15.95% in Q4 2022 and an 80 bps increase y-o-y from 15.36% in Q1 2022. The slight increase in vacancies from the previous quarter is primarily due to the continued completions of developments. The continued flight-to-quality and anticipated delays in the completion dates of pipeline developments will drive vacancy rates downwards between 15%-16% by end-2023.
On a year-on-year (y-o-y) basis, average Prime & Grade A rents in Metro Manila declined by 0.44%, despite a 74% y-o-y growth in net absorption in 2022. The total completions in Q1 2023 were recorded at 0.09 million sq.m, bringing the estimated total Prime and Grade ‘A’ office supply in Metro Manila to approximately 9.23 million sq.m.
Vacancy Rates to Improve as Completion Delays Continue
Approximately 63% of the expected supply of office developments to come on stream in 2022 were delayed within the next 12-24 months, resulting in a more subdued increase in vacancy rates within Q1 2023. The delays will even out the spread in office space delivery within 2023 and 2024 – which is lagging in new completions as the projected annual completion rate within the same period has declined by more than 60% compared to its pre- pandemic levels. Due to more sublime growth of supply and demand starts to recover, average Prime and Grade ‘A’ rents are estimated to grow by end-2023 within the high-end of the growth range of 1.5%-2.0%.
Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “The Metro Manila Office Market threaded on a continued recovery with slight increase in average asking rents in Q1 2023. We anticipate average vacancy rates within 2023 to taper down despite the continuing right-sizing and consolidation of space or converting to a hybrid set-up of several large occupiers. In the meantime, demand is expected to further grow as several multi-national companies firmed up plans to set up back-office or shared services operations in the country.”
Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield said, “As some occupiers continue to employ rightsizing strategies for their real estate spaces, the persistent high level of space vacancies is a good opportunity to negotiate for better terms in quality buildings. Companies with flexible and hybrid workplace ecosystems will benefit from the availability of quality space to upgrade the level of amenities that seeks to upgrade the convenience, activation, security, public transport access and technology to attract their respective employees back to the office.”
“On the part of the property owner and developers, future developments need to be lined up beyond 2025 in anticipation of future growth in office demand despite the still weak market recovery”, Mr Cordero added.
Demand Recovery Continue on Back of Revenge Spending and Travel
Revenge spending continue to pull the retail/shopping mall segment in Q1 2023 near full recovery or pre-pandemic levels. On the other hand, limits to discretionary spending may persist amidst elevated commodity prices, denting the recovery momentum of retail sales. Foot traffic, nonetheless, is expected to continuously improve as many businesses are back to normal operations. Meanwhile, new launches of standalone retail developments in key retail areas remain limited as investors and developers opt for smaller formats as components of integrated projects.
Mr. Cordero further added, “Capital values for industrial developments in Q1 2023 continue to pick up in key industrial areas as the current market trends continue to spur investments in areas of logistics, fulfillment and distribution centers, cold storage, and data centers. Significant increases were observed in the prices of industrial lands, partly due to increased accessibility to new and upcoming infrastructure projects, whilst rents for warehouses were observed to be tamer amidst rising supply.”
The speedy recovery of tourist arrivals bodes well for the hotel market outlook as occupancy rates are seen to further improve and rates to gradually recover. Nonetheless, clear industry strategies are needed to ensure that the pace of the country’s recovery remains consistent with other popular tourist destinations in the region.
On the other hand, the mounting inflation and interest rates may tame demand for mid-market residential properties as new potential buyers tend to delay investment decisions amidst gloomy economic sentiment. A moderate upswing in prices is still expected as restrained demand in the past few years at the height of the pandemic was finally unleashed.
Return to “older” risks – war, weather, (economic growth) warp
Estimated average office (gross) rental yields in Q1 2023 inched up by 65 bps from its Q4 2022 level to settle at 6.90%. Year-on-year, the rental yields increased by about 70 bps from its level in Q1 2022. C&W Research estimates rental yields to further inch up in the short-term, in anticipation of further adjustments in the key policy rate hike within 2023.
Mr. Cordero mentioned, “[A]s the pandemic scare slowly eases, old and familiar risks such as energy, food, and cost of living crisis have resurfaced. Coupled with market (down) cycle concerns, the global investment outlook is clouded by low economic growth period, hyperinflation environment and rapid technological advances. The over-all effect of a remarkably high-interest rate environment may shelve some potential investment deals and prompt investors to recalibrate growth plans in the medium-term.”
“Against the backdrop of continuing Ukraine-Russia conflict and brewing tension in the East and Southeast Asian regions, investor interest and diversification are being eroded. These geopolitical tensions can also lead to disruption in supply chains and their effect on international trade. The presence of extreme weather conditions will disrupt the local production of agricultural and food products, which may drive up headline inflation and undermine consumer purchasing power”, Mr. Cordero said.
“While consumer and business confidence remain highly susceptible to persistent market externalities, the growth trajectory of the travel and the IT-BPM industry will fuel demand growth. The recovery of the labor market and resiliency of remittances from overseas Filipinos will propel the recovery, albeit at a soft rate, for the real estate sector in the medium term”, Mr. Cordero further added.