Since the end of the Global Financial Crisis (GFC) in 2009 - and ultimately the Philippines was only briefly impacted by that - a constant in the office property market has been the struggle of the development community to build in sufficient volume to match the ever-increasing space requirements of the BPO sector. Vacancy rates in Metro Manila tumbled back to 3% by 2012 and have barely budged from that level since. The period 2014-2016 saw 1.6 million sq m in office space completions - almost matched by more than 1.5 million in sq m in net take-up.
With 3% vacancy, businesses are constrained to expand - they simply do not have an adequate choice of immediately available premises. Consequently, relocation decisions are postponed or compromised by location, size or building quality, space standards are falling rapidly as more employees are jammed into ever decreasing workstation sizes and pre-leasing commitments have been increasing.
The market appears to be facing demand headwinds. In recent years the BPO sector has accounted for 60-70% of total demand. That abruptly declined to 21% in Q1 2017 before a modest rebound to 31% as of the first half of the year.
The reasons for that are hard to quantify. The most cited factors are the lurch to economic nationalism in the United States, led by President Trump’s anti-outsourcing stance and a perceived decline in the peace and order situation in the Philippines associated with extrajudicial killings. BPO industry factors such as increasing talent recruitment difficulties (and cost) together with the threats to jobs from automation are also inevitably playing a part.
with transaction volumes merely holding-up, that means net take-up is also flat and suggests that in 2017 we will see a supply surplus of about 270,000 sq m and vacancy will rise to 6.3% by year end.
Already, some landlords, while trying to preserve headline rates, are offering increased rent free and other incentives. Net effective rents (NERs) probably plateaued in 1H 2017 and are now falling.
Tracking forward, if current net take-up of 550,000 sq m continues through to 2020 (against the forecast supply of 920,000 sq m per annum) then vacancy will reach a mid-teens level and rents will be falling sharply.
Of course, this won’t happen as supply forecasts are overdone. From the bitter experience of 1997-2002 the development community learned the necessity to turn off the supply tap – and quickly. That was adequately demonstrated in 2010 when after ramping-up supply to 480,000 in 2008 and 523,000 in 2009, completions fell sharply to 203,000 sq m in 2010 as projects were deferred or out-right cancelled.
While not much can be done about 2017’s completions and 80% of 2018’s supply has already broken ground, Colliers expects 2019 and 2020 completions to be severely pared back, perhaps to an estimated 55% to 60% of current forecasts and, maybe even more if the current net take-up of 550,000 sq m annually is not maintained.
Under that scenario, peak vacancy in Metro Manila would be around 8% at end 2018 before gradually falling back to around 6% by end 2020.
That would suggest an average vacancy of 7% in 2018-2020 which would be at the midpoint of an acceptable structural vacancy rate (US office market is 12% and rents are flattish) - meaning new entrants and companies needing to expand would have a reasonable choice of premises and that rents might be growing at near inflation levels. It is, however, admitted that real estate markets only rarely display equilibrium embodying these characteristics.
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