Manila, 10 May 2019 - In Q1 2019, Colliers recorded a marginal rise in vacancy due to substantial new supply in a number of business districts such as Quezon City. But low vacancy rates in the Makati CBD and the Bay Area have been constricting the expansion of tenants. A flight-to-quality, i.e. tenants’ transfer to newer and larger floorplate buildings was also prevalent during the period. To seize the rising demand, we encourage developers in locations with vacancy of between 0.6% and 3.0% to expedite construction and consider redeveloping old buildings. 

Meanwhile, outsourcing tenants looking for PEZA-approved space should consider newly-completed buildings in Quezon City while other occupiers should explore available space in Fort Bonifacio.

Supply breaches 11 million sq metres
Metro Manila’s leasable office stock reached 11.1 million sq metres as of the end of Q1 2019 following the completion of about 151,500 sq metres of new office space during the period.  

Makati CBD accounted for 48% of new office space with the completion of Ayala North Exchange Tower 2 and NEX Tower. The two new office towers are located along Ayala Avenue, the country’s main financial district. 

New office buildings that were completed along the fringes of the Makati CBD are Autometics Center and eWest Pod.  

Quezon City’s stock also expanded with the delivery of Centris Cyberpod Five, a PEZA-proclaimed building. Other new office towers completed in Q1 2019 include the Parkway Corporate Center in Alabang.

We see subdued completion in 2022 as developers are likely to pare down supply given the aggressive completions from 2018 to 2021, as well as a lack of developable land in major business districts and wait-and-see stance from both developers and occupiers in anticipation of the results of the 2022 presidential elections.

Bay Area’s office stock to exceed 1 million sq m by 2020
Barring any construction delay, we project the Bay Area’s office stock to exceed 1 million sq metres by the end of 2020, four times higher than the business district’s leasable stock in 2016, prior to the influx of offshore gaming firms from China. Developers continue to capture demand from offshore gaming firms, with about 50% of space due to be completed over the next three quarters already pre-leased to offshore gaming firms. 

Colliers sees faster expansion of leasable office space in the Bay Area and Makati Fringe as the two areas are likely to capture the demand from Makati CBD, which has been constricted by the lack of developable land.  

Vacancy to increase
In Q1 2019, Colliers recorded vacancy of 5.4%, higher than the 4.7% posted in Q4 2018. Across Metro Manila, we recorded lower vacancy in Makati fringe as well as in Ortigas CBD. Vacancies in Quezon City and Alabang rose due to the completion of additional space. Meanwhile, we attribute Fort Bonifacio’s marginally higher vacancy to spaces in older towers vacated by firms that moved to newer office in the business district.

From 2019 to 2021, Colliers sees an annual average vacancy of 6.3% across Metro Manila, given our annual completion forecast of 1.08 million sq meters and yearly net absorption of about 958,000 sq metres. The additional supply should be tempered by an active leasing market.

Demand remains firm
Colliers recorded 340,000 sq metres of transactions in Q1 2019, about 9% higher than the total transactions recorded in the same period in 2018. Outsourcing and offshore gaming firms accounted for the bulk of transactions while the traditional and non-outsourcing segment continues to grow on the back of a sustained economy and the government’s massive infrastructure push. 

Outsourcing firms providing voice support as well KPO companies that offer higher value outsourcing services including medical transcription, software engineering and shared finance and accounting services cornered 36% of the total transactions in Q1 2019. Among the major outsourcing deals closed during the period involved IBEX Global, 24-7 Intouch, IMS Health, and Real Page. 

‘Build, Build, Build’ chips in to office space take-up
A sector that developers should watch closely is the traditional segment which covers the office space take-up of multinational corporations, engineering firms, logistics companies, flexible workspace operators, and government agencies. In Q1 2019, the segment accounted for 35% of net take-up or about 116,800 sq metres, higher than its 26% share or 101,000 sq metre in the same period in 2018. Firms actively taking part in the government’s infrastructure projects are also occupying larger office spaces. Deals involving engineering and construction firms in Q1 2019 were recorded in Makati, Quezon City, and Fort Bonifacio.

Colliers sees continued demand from non-outsourcing tenants as these are companies that are indifferent to availability of PEZA-proclaimed space but whose annual expansions hinge on the growth of the country’s economy. We see the sustained macroeconomic growth boosting the office space demand of the non-outsourcing occupants particularly construction, insurance, and flexible workspace operators over the next three years.   

Colliers recorded net absorption of 72,200 sq metres in Q1 2019, significantly lower than the 417,400 sq metres posted in the same period of 2018 as much of the deals covered office spaces that are still being pre-leased and constructed. We see net take up picking up from Q2 to Q4 2019, in light of the completion of towers with high pre-commitment levels. 

Rents to grow 5%
Metro Manila’s average rent should increase by about 5% per annum from 2019 to 2021. We see faster acceleration of rents in the Bay Area and the fringes of Makati and Ortigas due partly to offshore gaming operations, but this should be offset by slower acceleration in sub-markets with higher vacancy.

Recommendations

Expedite building completion
Colliers believes that there is pent up demand for office space in major business districts such as the Bay Area and Makati CBD, where vacancy is between 0.6% and 1.4%. The lack of new office space has been constricting the expansion of outsourcing companies. In our opinion, developers should capture the sustained appetite for new space by expediting office space completion and redeveloping older buildings to offer new options with larger floor plates.

Respond to flight-to-quality, reposition old assets
Colliers believes that landlords are likely to remain competitive by improving office amenities. Over the past two years, Colliers has seen a more aggressive development of Leadership in Energy and Environmental Design (LEED) certified buildings while some developers are providing free access to the office towers’ executive lounge to C-level executives of their tenants. This should become more prevalent over the next three years as we see the expansion of discerning Knowledge Process Outsourcing (KPO) tenants.

Maximize proximity to infrastructure projects
Colliers encourages developers to maximize the proximity of their buildings to key infrastructure projects due to be completed in the next two to three years. Among these projects is the proposed Skytrain monorail that would connect Megaworld’s Uptown Bonifacio to the Metro Rail Transit (MRT) station in Guadalupe, Makati City. 

Tap traditional and emerging occupants’ rising demand
Among the notable deals we recorded in Q1 2019 were traditional occupiers such as insurance, financial technology (fintech) as well as engineering and construction firms and we see this being sustained over the next three years on the back of a sustained economic growth and the government’s massive infrastructure push.

Flexible workspace operators should also chip in to the demand as they are likely to lease out additional space in new buildings across Metro Manila. We encourage developers to be mindful of this segments’ office space requirements moving forward.

Push for more PEZA approval
In our opinion, developers, tenants, and other stakeholders should aggressively push for the proclamation of more PEZA space in Metro Manila, particularly in sub-locations where demand for additional PEZA space is high such as the Bay Area.


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Colliers International | Manila 11F Frabelle Business Center, 111 Rada Street Legaspi Village, Makati City 1229 Philippines | Tel: +632 888 9988