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Dichotomy in Policy: Duterte administration’s policies yield mixed results for office segment

The Duterte administration’s ‘Build, Build, Build’ push has been contributing to greater office space absorption in Metro Manila. Read more.

Manila, 22 May 2019 - The Duterte administration’s ‘Build, Build, Build’ push has been contributing to greater office space absorption in Metro Manila. However, delay in the proclamation of Philippine Economic Zone Authority (PEZA) parks and buildings is likely to affect the leasing of several buildings with pending PEZA approval in both Metro Manila and provincial areas.
In Q1 2019, Colliers recorded a marginal rise in Metro Manila office 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,” said Dom Fredrick Andaya, Colliers International Philippines director for office services. 
‘Build, Build, Build’ chips in to office space take up

Andaya pointed out that “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 meter 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,” Andaya added.  
Colliers recorded net absorption of 72,200 sq meters in Q1 2019, significantly lower than the 417,400 sq meters 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. 
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. 
Push for more PEZA approval

Andaya stressed that the continuous influx and expansion of the offshoring and outsourcing companies should be supported by the government with the more active approvals of PEZA applications. A market with low vacancy and insufficient amount of PEZA-registered supply is not good for the industry. The government has to step in to normalize the situation. The rising real estate cost coupled with the possible change in the tax structure will make the country less attractive to the O&O industry.