Manila, September 24, 2018 - Similar to Metro Manila, there were initial concerns that office space demand from outsourcing firms in Metro Cebu will slow down this year. Colliers International Philippines believes that the uncertainties were brought about by the shift to greater economic nationalism in the United States, led by the anti-outsourcing stance of the present administration; the perceived decline in the peace and order situation in the Philippine; and delay in the proclamation of Philippine Economic Zone Authority (PEZA) buildings, which enables tenants to apply for tax and non-tax incentives.
But the Metro Cebu outsourcing sector, which includes call centers and knowledge process outsourcing (KPO) companies that provide higher-value services such as medical coding, legal transcription, software engineering, and finance and accounting remains robust. For the first half of the year, Colliers recorded about 58,000 sq m in office transactions. BPOs and KPOs accounted for a combined 74% of the total. Among the large BPO and KPO companies that occupied space in Cebu in 1H2018 are Shearwater Health, Cresco Shared Services, Convergys, Wipro, and Teledirect. They primarily provide healthcare, information technology (IT), and customer support services.
Traditional and non-outsourcing firms covered about 12% of total transactions in 1H2018 with remittance centers, insurance companies, and educational services occupying space.
Offshore gaming, meanwhile, accounted for the remaining 14% of transactions. Colliers believes that offshore gaming has the potential to become a major plank of the Cebu office market. With a more conducive local regulatory environment, we expect offshore gaming to become a major contributor to office space take up in Cebu.
Language Centers as a potential demand driver
Colliers believes that firms that provide English as a secondary language (ESL) services will be a major contributor to office space demand in Cebu moving forward. Among the ESL centers already operating in Cebu are QQ English, TOMAS English Training Center, Access E-Talk Plus, Nexseed, and Winkey Online English Academy. In our opinion, the expansion of these companies as well as the entry of new players bodes well for office space expansion moving forward. A mix of existing and new ESL providers is reportedly considering new office space due to be completed over the next 12 to 18 months in major business parks such as Cebu IT Park and Cebu Business Park.
Vacancy declines to 7.6%
Overall vacancy in 2Q2018 reached 8.9%, lower than the 9.5% recorded in 1Q2018. Cebu Business Park (CBP) and IT Park recorded vacancy of between 5.5% and 7.4% while their fringes posted a vacancy of only 1%. Mactan’s vacancy declined to 5% due to strong leasing from the start of 2018 while Mandaue’s vacancy dropped to 30%. Overall, Colliers expects Metro Cebu’s office vacancy to hover between 8% and 9% by the end of the year.
Most of the demand is seen in Cebu’s primary business districts – Cebu Business Park (CBP) and Cebu IT Park (CIT) – given the following:
- Critical mass
- Presence of support facilities such as 24/7 transportation hubs and retail options
- Available quality office spaces
Colliers expects strong demand to continue especially with Cebu Business Park and IT Park being established information technology zones. We see Mactan vacancy dropping further as more offshore gambling firms open shop while the Uptown/Downtown area will continue to attract more traditional and non-BPO firms.
Cebu office stock breaches 1M sq m
Cebu’s office stock reached 960,000 sq m of gross leasable area (GLA) as of end-2017. The figure is four times larger than Metro Cebu’s stock 10 years ago. As of 2Q2018, Metro Cebu’s office stock reached 1.01 million sq m following the completion of three new buildings – Mabuhay Tower 1 and Filinvest Cebu Cyberzone Tower 2 in Cebu IT Park and Tech Tower in Cebu Business Park. The new towers were developed by Filinvest Land, Enrison, and Cebu Holdings. The three buildings delivered a combined 53,000 sq m of new leasable office space.
For 2H2018, we see the delivery of nearly 30,000 sq m of new leasable office space. Megaworld is set to complete its Pacific World Tower while Premiere Diamond Developers is due to deliver its HM Tower in 2H2018.
Colliers sees Cebu's office stock reaching 1.04 million sq m before end-2018. This is more than double Metro Cebu’s office stock in 2011.
Both national and local developers are cashing in on the rising demand from both outsourcing and non-outsourcing tenants.
Grand Land, Inc., the Gaisano Grand Group’s real estate arm, is actively leasing its mixed-use, office condominium development, Grand Tower Cebu. The development is the first high-rise and mixed-use project at the North Reclamation Area in Cebu and features 30-storeys, ample parking space, a vibrant and dynamic grand lobby and three components: office spaces, hotel and retail outlets.
The project’s mixed-use concept makes it an ideal environment for a live-work-play lifestyle. It is highly accessible via public transportation with wide road networks in the neighborhood and boasts of recreational amenities and close proximity to malls, business centers, schools and hospitals. “We expect more outsourcing and non-outsourcing tenants gravitating toward integrated communities as they offer a better living and working environment. With retail and hotel complements, we expect Grand Tower to be among the preferred office towers in Cebu moving forward,” said Colliers International Philippines Director for Landlord Representation Andrew Gomez.
Another homegrown developer, Alpa Land, is targeting both outsourcing and traditional companies. Its building, ADG I.T. Tower, is an 8-storey commercial building with a roofdeck. The development is PEZA certified, very accessible via public transportation and is fully-equipped with electrical and auxiliary provisions for I.T. requirements. The ground floor complements the building’s operations by allotting commercial spaces for business, dining and leisure and the building sports flexible interior layouts.
“We at Colliers International Philippines believe that the continued demand for office space should propel both traditional and outsourcing firms to gravitate towards emerging business hubs such as Mandaue city. This should fuel demand for new office towers in the city such as ADG I.T. Tower,” Gomez noted.
Meanwhile, the Buildcomm Center by Buildcomm Horizon Holdings, Inc. continues to accommodate traditional firms. The office tower was able to position itself as a strategic option for expansion and relocation plans of these companies providing audit, insurance, financial, and software services. The building benefits from its strategic location as it is within the Cebu Business Park. The building is 97% leased.
Rents hold firm
We expect Cebu Business Park and IT Park to continue to command the highest lease rates across Metro Cebu. In 2Q2018, Cebu IT Park recorded the fastest rise in office lease rates – at 11% to 13%. We project average lease rates in these sub-markets to grow between 3% and 5% annually from 2019 to 2021. We still see upward pressure in rent given the strong demand in these sub-locations. Lease rates in other districts should grow at a more conservative 2% to 3% per annum from 2019 to 2021.
“Overall, Colliers believes that Metro Cebu’s competitiveness as a desired BPO investment hub will be sustained as it serves as the gateway to the Visayas Islands. This is complemented by the completion of the new terminal of Mactan-Cebu International Airport. Aside from being a manufacturing base, its economy is being propelled by the BPO industry. Both sectors are major contributors to office space take up in Metro Cebu,” said Dom Fredrick Andaya, Colliers International Philippines Director for Office Services.
“Expatriates also prefer Cebu because of its beach resorts and other tourist destinations. Lastly, Metro Cebu has been enticing foreign and local investors as businessmen continue to enjoy the comforts of an urban landscape balanced with natural attractions,” Andaya stressed.
Ripe for an upgrade
Colliers recommends that national and homegrown developers in Cebu continuously upgrade the projects in the market to remain competitive considering discerning preferences of high-profile KPO tenants.
On the other hand, tenants should be more discerning in selecting office spaces as options in the market expand. “We believe that today’s labor force is also more discerning in selecting companies to work in and the type of workspaces would also be key in attracting and retaining the right talent. We see this trend in Cebu office moving forward,” added Andaya.
Flexible office cuts
We encourage developers to construct office space that could accommodate non-outsourcing and traditional businesses that require smaller space. Developers should be more flexible and keep in mind that the expansion of the Cebu economy drives the growth of traditional firms such as those involved in engineering and logistics that occupy smaller office space. This is particularly important for office towers that will be built around the Uptown/Downtown area which remains as the preferred location of traditional and non-BPO businesses. The Central Visayas’ economy grew by 5.1% in 2017 with Services accounting for 56% of the region’s economic output. Developers should also consider government agencies in old office buildings that are likely to transfer to newer and larger offices in the near to medium term.
New kid on the block: Co-working space
Metro Cebu is part of Central Visayas which is considered a hotspot for micro, small, and medium enterprises (MSMEs). The continued growth of MSMEs and start-ups should fuel demand for flexible workspace. Given this trend and the worsening traffic in Cebu, we encourage developers to carve out more flexible office space especially in malls. In 1H2018, significant office space was occupied by international flexible workspace operators such as Figari and Common Ground. Colliers sees these firms expanding outside of Metro Manila in the near future and Cebu is a practical choice given that it is the largest metropolitan area in the country after Metro Manila.
“The challenge for both operators and developers is to adapt to the demands of the market to either remain competitive or participate in this growing sector. Colliers believes that flexible workspace operators can consider buying office spaces and converting them to co-working spaces; or partnering with developers to mitigate the impact of increasing rents. On the other hand, we encourage developers to dedicate co-working spaces in their buildings to take advantage of the sector’s growth,” said Maricris Sarino-Joson, Colliers Philippines Associate Director for Office Services.
“We expect the current flexible workspace stock in Metro Manila to grow by at least 10% annually in the next three years on the back of a faster growth from micro, small, and medium enterprises (MSMEs); naturally we see this demand spilling over to Cebu,” Sarino-Joson stressed.
“There are several bills pending in Congress which, once enacted, should help small businesses in major urban hubs across the country including Cebu. Among these measures are Innovative Startup Act and a bill expanding firms’ access to financing. These should support small Filipino firms’ operations and encourage them to occupy flexible workspace,” Sarino-Joson noted.
Offshore gaming and logistics
Colliers projects a rapid expansion of these segments over the next 12 to 24 months particularly in light of the implementation of a new city ordinance that transfers international port operations to Consolacion. This is part of the government's plan to decongest the current port area. A more robust logistics segment translates into greater absorption of office space.
The Mactan area is becoming a preferred location of offshore gambling firms. Hence, we encourage developers in the area to carefully assess the needs of these firms to entice more potential locators. As a start, developers should construct buildings with large floor plates and residential complement.
We recommend that developers build office towers within integrated business hubs as these townships enhance living and working conditions. Developers should explore parcels of developable land especially in Mandaue and Mactan areas that would benefit from the completion of major infrastructure projects such as the expanded Mactan-Cebu International Airport; Cebu Cordova Expressway Link; and Cebu-Negros bridge. The government recently announced that the Cebu Bus Rapid Transit (BRT) will be prioritized and this should play a crucial role in decongesting Cebu traffic and improving connectivity to business districts.
In view of these developments in the Cebu office market, Colliers recommends that tenants look to Cebu Business Park and IT Park for its immediate requirements as this district is preferred by most employees given its proximity to residences and commercial establishments. However, they must also keep an eye on other locations Mandaue, Uptown/Downtown and Mactan given that planned infrastructure projects will improve access to these locations eventually. Developers on the other hand, are encouraged to build new buildings, possibly within township projects that will activate the potential of new locations, maximizing the benefit of newer access roads.