Vacancy rates in the Metro Manila office market are expected to remain elevated in the medium term, driven by the total ban on Philippine Offshore Gaming Operators (POGOs) and the implementation of the CREATE MORE Bill, according to a commercial real estate services firm.
In its latest Marketbeat report for the Metro Manila office market, Cushman & Wakefield Philippines said that the overall vacancy rates for Prime and Grade ‘A’ Office developments in Metro Manila rose by 280 basis (bps) quarter-on-quarter (q-o-q) in the third quarter of the year and by 136 bps compared to the previous year.
“The average vacancy rate reached 18.2 percent, the highest level estimated by Cushman & Wakefield Research since Q2 2004, marking an increase of over 1,380 bps since Q2 2020,” Cushman & Wakefield said.
It noted that an additional 114,000 sqm of office space was added to the market in the third quarter.
“This, along with the significant volume of returned office spaces due to major corporate occupiers rationalizing their office needs, has increased the volume of vacant spaces,” it added.
The real estate services firm noted that in the medium term, vacancy rates are expected to remain high due to the total ban on Philippine Offshore Gaming Operators (POGOs) and the implementation of the CREATE MORE Bill, which supports flexible work arrangements and will likely result in more vacant spaces.
“The Metro Manila office market is exhibiting a slower-than-expected recovery in Q3 2024. Overall vacancy rates have steadily increased and average headline rents have marginally declined again this quarter, making the market more favorable for tenants. The initial effects of the total POGO ban and amendments to the CREATE Bill are already being felt in Q3 2024,” Cushman & Wakefield Philippines Director and Head of Tenant Advisory Group Tetet Castro said.
“Several returns of office space are observed, coupled with the completion of new developments, have resulted in the increase in overall vacancies. In the medium term, elevated vacancy rates and lower headline rents in the Metro Manila office market are expected,” Castro added.
Cushman & Wakefield said some prime and grade A developments in the CBDs are maintaining steady headline rents this quarter.
“However, major developers have indicated that these rents are negotiable, with significantly lower rates achievable. Additionally, developments outside the CBDs, affected by the return of office spaces, are offering more attractive headline rents, which could potentially lower average rents in the short to medium term, “it added.
Cushman & Wakefield Philippines Director and Head of Research, Consulting & Advisory Services Claro Cordero said that the most significant increases in vacancy rates in the third quarter were seen in mature markets, particularly in the cities of Pasay, Taguig, and Makati.
Cordero said the Pasay City corridor experienced a rise of over 690 bps q-o-q, followed by the Taguig City corridor with a 590 bps q-o-q increase, and the Makati City corridor with a 180 bps q-o-q increase.
“The high concentration of POGO companies in Pasay City and new completions with low pre-commitment levels in Taguig City and Makati City have contributed to these elevated vacancy rates. In contrast, vacancy rates in office developments near the borders of Metro Manila, such as Muntinlupa City, Parañaque City, and Quezon City, remained relatively stable, with changes below 50 bps q-o-q,” he added.
Global political events and AI advancements impact office space demand growth
On top of the effects of the total ban on POGOs and the CREATE MORE Bill, the country’s office market is also seen to be impacted by global political events and AI advancements which may pose challenges to office space demand growth.
“The U.S. Presidential election introduces another challenge for the outsourcing industry due to the short-term uncertainty surrounding key policies affecting U.S. firms’ outsourcing activities. This is compounded by the slowdown in creating regional hubs, as the global economic growth outlook remains subdued,” Cordero said in a statement before the Nov.5 U.S. Presidential elections.
“Despite these challenges, multinational companies (MNCs) are establishing global capability centers (GCCs) to focus on strategic and core functions, leveraging innovation, international talent, and cost efficiencies for business growth. GCCs provide multinational companies with greater control and oversight, enabling them to reinvent their shared services, research and development, and center-of-excellence capabilities. Globally, around five million square meters of demand is expected in the next 2-3 years. Besides India, the Philippines is a leading contender in this emerging trend, thanks to its strengths and capabilities as a top outsourcing destination,” he added.
Before U.S. President Donald Trump won the elections, the IT and Business Process Association of the Philippines (IBPAP) expressed optimism for the industry’s continued growth regardless of who wins the U.S. elections.
Apart from the U.S. elections, Cordero also cited the increasing use of artificial intelligence (AI) advancements, especially in the IT-BPM industry as another development that could impact office demand.
He emphasized that this could potentially limit the demand growth for office spaces in key markets if stakeholders do not fully adapt to these changes.
“AI-driven technologies like virtual assistants, chatbots, and automated customer service interfaces have replaced human roles due to their improved efficiency, service quality, and cost-effectiveness. However, AI still requires human intervention for data analytics and managing more complex customer service issues. Therefore, it is crucial for industry stakeholders to develop policies and programs that equip and upskill workers in the IT-BPM sector with the necessary technical skills. This will help them navigate the evolving demands and seize new opportunities, ensuring steady industry growth and continued demand for office spaces in the long term,” Cordero said.
Real estate growth trends to be impacted by market disruptors
The office market is not the only sub-sector that has its set of challenges as a series of market disruptors are seen to impact the growth of other real estate sub-sectors, according to Cushman & Wakefield.
“The series of market disruptors – including the US Presidential election, a total ban of POGOs, persistently high interest rates, sluggish recovery of major developed economies, and rising geopolitical tensions – will significantly impact the future growth and trends of key real estate market indicators across office, residential, retail, hospitality and industrial segments,” the real estate services firm said.
“With near-historic high market vacancy rates, the closure of POGO operations, and the ongoing trend of flexible work schemes, office market vacancy rates are expected to rise further, according to Cordero.
“In the residential segment, the recent monetary policy easing may not immediately translate to stronger demand for residential developments in the near term. However, it is expected to stabilize housing demand for mid-priced units in the long term. Further, whilst local consumer purchasing power is anticipated to moderately recover in the near term due to expected further policy rate cuts by the Bangko Sentral ng Pilipinas (BSP) and a slowdown in inflation to 1.9 percent by the end of September, the weak recovery of major developed economies could hinder rapid trade growth and moderate growth of inflow of remittances from overseas Filipino workers,” Cordero said.
He noted that while the seasonal spending surge is expected to boost retail sales and customer visits, the medium-term outlook for the retail sector remains moderate as consumers adjust to gradually easing living costs. In contrast, Cordero also highlighted strong growth prospects in the industrial and hotel sectors, where new supply is helping to stabilize rental rates amid steady demand from logistics and warehousing tenants.
