- Uptrend in office vacancy rates continue amidst continued completions of developments in Metro Manila
- Occupiers review their long-term real estate strategies to become more responsive to post-pandemic work conditions and modes of working
- Estimated average office (gross) rental yields in Q2 2023 remained unchanged from its Q1 2023 level at 6.90%.
Overall Grade ‘A’ office vacancies in Metro Manila increased to 16.90% by end-Q2 2023, a 74-bps increase q-o-q from the estimated 16.16% vacancy rate in Q1 2023 and a 69-bps increase y-o-y from the 16.2% vacancy rates estimated in Q2 2022. The increase in vacancies in Q2 2023 results from the continued completions of developments in Metro Manila of roughly 0.13 million sq.m. and the return of office space by some occupiers as more companies engage in the hybrid work system. Despite overall vacancies increasing in Q2 2023, quarterly net absorption remains positive with roughly over 36,000 sq.m. recorded during the period.
Minor Adjustments in Asking Rents Suggest Recovery of Office Market Fundamentals
With the prevailing high vacancy rates in Metro Manila, the average asking rents of Prime and Grade ‘A’ offices remained steady at PHP 1,041 per sq.m. per month by end-Q2 2023. Albeit a minor adjustment from the previous quarter’s average rent, this figure is a 0.21% increase y-o-y from the reported average asking rents of PHP 1,037 per sq.m. per month in the same quarter of the previous year suggesting the continued recovery of the office market fundamentals.Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “The uptrend in overall vacancies in Metro Manila is attributable to the continued completions of developments and the return of office space by occupiers employing rightsizing strategies. Outlook remains that the vacancy figures will improve in the latter half of the year as more companies become comfortable in having their employees return to office, as well as the projected growth of the IT–BPM Sector in the country.”
Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield said, “Office space rental rates go into a standstill as vacancies continue to exhibit an upward trend attributable to the increase in supply as previously delayed projects are now being gradually completed. Moreover, occupiers review their long-term real estate strategies to become more responsive to post-pandemic work conditions and modes of working.”
Activities in the Hotel and Industrial Segments Poised for Further Growth
As the stabilizing inflation rate encourages consumer spending on goods, retail sales are seen to improve, albeit modestly due to lingering market uncertainties and inflation growth threats. Nonetheless, the resumption of recreational and entertainment activities in shopping centers has further boosted footfall which is now observed to be close to pre-pandemic levels, especially in major retail establishments in key retail districts.Mr. Cordero further added, “The fast-evolving online economy in the Philippines, which is poised for further growth in the medium term, along with other trends such as the insurgence of the cold storage industry continue to create opportunities in the industrial property segment. The increased demand from investors led to sharp increases in selling prices of industrial land whilst moderate increases in standard factory buildings (SFBs) lease rates were observed due to the continuous delivery of new supply.”
The normalizing business conditions, rising consumer income, and improved overall economic sentiment help drive the growth momentum of the residential segment. Meanwhile, the possible impacts of increasing mortgage rates and global disturbances on major drivers such as the OF remittances may dent demand in the short term, specifically on recently launched developments.
Meanwhile, due to the gradual return of inbound tourists, the hotel segment is now attracting new investments, with local and global operators rolling out expansion plans in various destinations in the country. Investors are also banking on the strong demand for domestic travel as well as the resumption of business travel which has buoyed occupancy levels in the past quarters.
Market Threats and the Possible Cooldown Effect On Real Estate Investments
Estimated average office (gross) rental yields in Q2 2023 remained unchanged from its Q1 2023 level at 6.90%. Year-on-year (YoY), however, the rental yields increased by about 70 bps from its level in Q2 2022. C&W Research estimates rental yields to remain unchanged in the short-term, as the Bangko Sentral ng Pilipinas (BSP) poses a more conservative stance in policy rate adjustments despite anticipated rate hikes from other advanced economies for the remainder of 2023.Mr. Cordero mentioned, “The global recessionary pressures and their cooldown effect on real estate investments may prompt corporate restructuring and refinancing, which will likely restrict new project launches across the segments in the medium term. Despite sound local economic fundamentals, the continued capital flight towards more advanced markets and economies will affect the local real estate investment market. Also, to arrest the spiraling inflation rate growth, the BSP liberally used foreign exchange reserves and adjusted its policy rate by 425 bps since Q2 2022. This aggressive monetary policy stance may have potential long-term effects on demand-side growth, such as higher interest rates on existing and new housing and other real estate-related loans and increases in related occupancy costs.”
“Amidst uncertainties, investment decisions will be hinged on the stability of market fundamentals and how policymakers effectively manage future shocks to macroeconomic variables, such as inflation and interest rates, while ensuring demand growth”, Mr. Cordero said.“As financing becomes more restrictive, potential transactions and acquisitions of strategic non-CBD assets may be more favorable in the offing. Affordability issues due to higher bank interest rates will also affect the recovery and growth of the middle-income housing markets”, Mr. Cordero further added.
