Manila, 10 May 2019 - In Q1 2019 retail vacancy in Metro Manila rose after three consecutive quarters of decline. Despite this, we see opportunities as developers have been aggressive in renovating spaces and housing experiential and lifestyle-centric tenants to improve consumers’ retail experience and sustain footfall. To further capture opportunities, we encourage developers to use pockets of vacant space in malls to improve tenancy mix, incorporate foreign retail experiences, and utilize technology. Meanwhile, tenants testing the market should scout for available space in malls within integrated communities.

Township malls expand retail supply

The renovation of Robinsons Galleria in Ortigas Center was completed in Q4 2018. Other new malls completed from Q4 2018 to Q1 2019, include the Met Live Mall Phase 1, Ayala North Exchange Phase 1 and One Bonifacio High Street. The new malls are within townships in Makati CBD, Fort Bonifacio, and the Bay Area and support the retail demand of offices and residential towers within the integrated communities.

About 93,000 sq metres (1 million sq feet) of new retail space was completed during the period, expanding Metro Manila’s retail stock to 6.9 million sq metres (74.3 million sq feet) as of Q1 2019. From 2019 to 2021, Colliers projects the completion of about 1 million sq metres (10.8 million sq feet) of new retail space or about 350,000 sq metres (3.8 million sq feet) per year.

Rising vacancy an opportunity to improve tenancy

Metro Manila’s vacancy rose to 10% in Q1 2019 from 9.0% in Q3 2018. Colliers attributes this to developers’ continued challenge in filling up retail spaces completed in the past six to 18 months. The rise was primarily driven by vacancies in a number of regional malls, offering a gross leasable area (GLA) of between 50,000 sq metres (538,000 sq feet) to 100,000 sq metres (1.1 million sq feet), across Metro Manila. They recorded a vacancy of 14% in Q1 2019, up from 11% in Q3 2018.

The vacancy of super-regional malls offering leasable space of more than 100,000 sq metres (1.1 million sq feet) was stable at 4.0% as a significant portion of retail space is taken up by developers’ anchor tenants.

In 2019 Colliers sees Metro Manila recording an 11% vacancy rate due to the substantial new supply. This should increase to 12% by the end of 2021 following the completion of new retail space across key business districts in Metro Manila.

Over the past 12 to 24 months, Colliers has observed an increased effort amongst Metro Manila malls to differentiate. In fact, mall operators have been using pockets of vacancies to incorporate a lifestyle-centric retail mix to retain old consumers and appeal to a younger profile of mallgoers. While e-commerce has been disrupting traditional retail, Filipino consumers generally still enjoy seeing items and receiving face-to-face service. We believe that this is something that mall operators and retailers should take advantage of. Colliers believes that more shoppers will probably be drawn to physical malls if retailers offer a wide array of F&B options; spacious public seating; interactive kiosks and pop-up stores; Instagrammable retail spaces; limited edition items; and more creative ways of testing products.

Over the past two years, we have seen malls using pockets of vacancies and redevelopments to feature expansive family entertainment centres; develop a farm-to-market inspired food court; house Europe's largest retailer of affordable sports equipment and apparel that offers sports training; curated retail and dining concepts from Japan and South Korea; and open an experience store with a media company.

Over the next three years, Colliers expects developers to further renovate and implement differentiation strategies to stay in the game and complement the sustained same-store sales growth of a number of retail firms. Among the new malls due to be redeveloped or expanded from 2019 to 2021 are Ayala Malls Cloverleaf, Greenbelt 3, Glorietta 3, Estancia Mall, SM Mall of Asia, SM City Fairview, Robinsons Place Manila, Robinsons Magnolia, Gateway Mall and Greenhills Shopping Centre. During the period, major malls’ differentiators will likely include a 500-seater air-conditioned chapel; organic vegetable garden and a gourmet foodhall; and an expansive retail space for tiangge or bazaar tenants.

Retailers are still enticed by consumers’ rising purchasing power especially after the implementation of lower personal income tax rates in 2018. In our opinion, retail spending in Metro Manila should continue to receive a major boost from overseas Filipino Workers’ (OFW) remittances, which reached USD5.3 billion (PHP274.8 billion) for the first two months of 2019, up 2.3% YOY according to the Philippine central bank.

Over the next three years, we see a sustained retail space absorption from F&B retailers which account for nearly 40% of incoming tenants in malls across Metro Manila. Clothing and Footwear covers about 17% of tenants due to occupy space from 2019 to 2021.

Slower rental growth

From 2019 to 2021 we see rental growth facing pressure due to the completion of substantial supply during the period. From our Q3 2018 projection of 2.0%, we now see rents growing by a slower 1.4% per year from 2019 to 2021. We project at least a 2.0% increase after 2021 as the delivery of new supply tapers.

Tap opportunities provided by vacant space

Developers should use their renovation or expansion projects as an opportunity to expand F&B tenants and upgrade other retail features such as cinemas and activity centres. Colliers recommends that developers use pockets of vacancies in their malls to house more lifestyle-oriented retailers to attract more consumers and balance the rising popularity of online shopping in the country.

Implement foreign retail experiences

The ongoing renovation of malls is another opportunity for developers to bring in interesting foreign retailers. Malls with foreign-themed retail concepts should provide a complete foreign shopping experience. The first Mitsukoshi mall in the Philippines, due to be built in Fort Bonifacio in 2021, will probably go beyond offering a wide array of Japanese items to include training staff in omotenashi or the Japanese way of hospitality. Local developers need to highlight their partnership with foreign brands that are popular amongst high-spending consumers and millennials that love to travel.

Smart malls

SM Supermalls recently launched Sam, its first in-mall artificial intelligence robot. In our opinion, mall operators and retailers should maximize the use of technology and consumer analytics. We encourage developers to explore the viability of deploying consumer-assisting robots and tie up with app developers to better capture consumer preferences and regularly send personalized content. Colliers believes that both mall operators and retailers should explore the roll-out of e-wallets and self-checkouts to reduce foregone sales attributable to frustrated consumers abandoning purchases due to long queues.

Test the waters by opening pop ups

Colliers believes that opening pop up shops is an ideal option for F&B, sporting goods, e-commerce, and clothing brands that are testing the Manila retail market. This is also an option that exhibitors in weekend markets in posh villages should explore if they want to cater to a larger consumer base.

Leverage showrooming

With rising vacancy across Metro Manila, developers should be more open to online retailers that use brick-and-mortar space for showrooming, or apportioning an area dedicated for product testing, but purchases are made online due to their affordability. Clothing and footwear brands, for instance, should consider incorporating augmented reality window shopping and interactive mirrors.

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