Manila, 6 February 2019 - Both business and knowledge process outsourcing firms drove leasing in 2018, and we see this trend continuing in 2019. However, the office space demand of cost-sensitive call centers may be curtailed by the slow release of Philippine Economic Zone Authority (PEZA) proclaimed office buildings. To take advantage of opportunities in the sector, Colliers urges developers to: implement strategic land banking near Manila subway stations; push PEZA zone applications; and target non-outsourcing tenants while PEZA applications are pending. Meanwhile, flexible workspace operators should aggressively differentiate their offerings.
Colliers recorded more than 370,000 sq metres of net take-up in Q4 2018 outpacing our initial projection of 344,000 sq metres. The figure is 31% higher YoY. Total net take-up for 2018 reached 1.18 million sq metres, a record-high for Metro Manila and exceeding our initial projection of 1.15 million sq metres.
Colliers expects the strong demand to continue in 2019 as buildings we project to be completed over the next 12 months are about 28% pre-leased as of Q4 2018. Based on Q4 2018 pre-commitment status, we expect Alabang, Makati CBD, Fort Bonifacio, and the Bay Area to record the strongest take-up in 2019. For 2019 to 2021, we project net take-up to average around 900,000 sq metres per annum.
We project demand moving in step with new supply. Over the next 12 months, Colliers sees the delivery of nearly 1.2 million sq metres of new office space and net take-up of about 1 million sq metres (10.7 million sq feet). This should yield a vacancy of 5.0% by end-2019.
Outsourcing to stay and grow
Knowledge Process Outsourcing (KPO) firms led the demand from outsourcing occupants, covering 27% of net take-up in 2018 or about 381,000 sq metres (4.1 million sq feet).
Among the KPO companies that occupied space in Q4 2018 are Infosys and AECOM.
Colliers sees the KPO sector driving office demand in the next 12 months. KPOs provide higher-value outsourcing services such as health information management, software engineering, and finance and accounting. The entry and expansion of Amazon and Google indicates that Metro Manila is able to successfully compete for major KPO business.
Quezon City surprises
In Q4 2018, Quezon City accounted for 40%, or 152,000 sq metres (1.6 million sq feet), of new office supply in Metro Manila.
This is the first time in 11 quarters that Quezon City accounted for the bulk of new supply in Metro Manila. Among the new buildings in Quezon City are Araneta Cyberpark Tower 2 by Araneta Center Inc. (70,500 sq metres or 759,000 sq feet).
Also in Quezon City are Vertis BPO Phase 3 by Ayala Land Inc., Robinsons Zeta Tower by Robinsons Land, and Mpire Center by Mpire Development Corporation. Araneta Center accounted for 60% of Quezon City’s new office stock with Vertis North covering 34%.
The delivery of new buildings indicates the growing interest in Quezon City. Colliers sees more aggressive development after the groundbreaking for the first three subway stations (Quirino Highway Station, Mindanao Avenue Station, and North Avenue Station), completion of Metro Rail Transit (MRT)7 that extends to San Jose del Monte in Bulacan; as well as clarification from the local government regarding offshore gaming operations.
Healthy pipeline to 2021
From 2019 to 2021, Colliers estimates the completion of 950,000 sq metres (10 million sq feet) annually. The figure is more than double the 450,000 sq metres (484,400 sq feet) of new supply completed per year from 2012 to 2016.
During the three-year period, Colliers expects Fort Bonifacio, Ortigas Center, and Manila Bay Area to account for 54% of the new supply.
Vacancy of below 6.0%
Metro Manila recorded a vacancy of rate of 5.0% in 2018 which is in line with Colliers initial forecast. The sustained take-up from a diversified group of occupants should keep vacancy at around 5.0% over the next 12 months. Office space due to be completed over the next 12 months is 28% pre-leased as of end-2018.
Rents continue to rise
Prime and Grade A office space in the Makati CBD and Fort Bonifacio continue to command the most expensive rents, ranging from PHP930 (USD17.5) per sq metre to PHP1,900 (USD35.9) per sq metre as of Q4 2018.
From 2019 to 2021, Colliers expects average rents across Metro Manila to rise by 8.0% per annum on average as we project a tight market during the period. The continued take-up of space from KPO firms that locate in new, high quality office space and offshore gaming firms willing to pay a premium to occupy space should sustain a healthy increase in lease rates.
In light of the current market, Colliers recommends the following measures:
Accelerated PEZA proclamation and ex-Manila expansion
Colliers encourages the government to expedite the approval of PEZA applications to sustain the outsourcing sector’s growth. In our opinion, stakeholders such as developers and qualified occupants should aggressively call for the proclamation of new PEZA spaces in Metro Manila and provincial areas.
BPO tenants have been looking for PEZA-proclaimed spaces in areas outside Metro Manila to enjoy tax and non-tax incentives. We believe that among the more viable alternative sites are Cavite, Cebu, Bacolod, Iloilo, Clark, and Davao. These locations offer a combined 1.4 million sq metres (15 million sq feet) of PEZA-proclaimed space, about a tenth of which has yet to be occupied. Vista Hub BPO Molino in Cavite was recently proclaimed a special economic zone.
Target non-outsourcing tenants
Colliers also encourages developers with pending PEZA applications to start targeting traditional and non-BPO firms that have been expanding across Metro Manila. The country’s budget secretary is expecting GDP growth of 7% to 8% from 2019¹. This, combined with a strong macroeconomic backdrop, should support the expansion of these businesses and eventually compel these firms to occupy larger offices.
Lock-in pre-selling rates and space in new office buildings
We see take-up from traditional (non-outsourcing tenants including flexible workspace operators and government agencies) and outsourcing firms to remain strong. Occupants with immediate office space requirements should consider new buildings that we project to be completed in Fort Bonifacio, Ortigas Center, and Manila Bay area in the next 12 months.
Consider new space in Quezon City
Office space in Quezon City is about 20% to 30% cheaper compared to space in the Makati CBD, Manila Bay Area, and Fort Bonifacio. Aside from cheaper lease rates, Colliers encourages cost-conscious tenants to consider Quezon City as the area’s proximity to Caloocan, Malabon, Navotas, and Valenzuela (CAMANAVA) region and the Bulacan areas makes it an attractive area especially for outsourcing firms looking to tap the labour pools in Northern Metro Manila and Central Luzon.
Flexible workspace operators should differentiate
Given the stiff competition in the market, Colliers encourages flexible workspace operators to differentiate and consider incorporating wellness and lifestyle classes as well as food and beverage outlets. In our opinion, the concept of co-living is something that operators should seriously consider offering in 2019. Flexible workspace operators should be more open in partnering with developers of hotels, malls, residential towers, and condominiums marketed to professionals.