Office landlords lower rental rates as vacancy seen to rise this year

2020 was a year full of challenges and opportunities for the Philippine real estate industry as the lockdowns brought by the COVID-19 pandemic has caused disruptions across various industries.

While Metro Manila’s community quarantine levels have eased now compared to the start of the pandemic, the impact of the stricter lockdowns is still seen to be felt by the real estate sector this year, particularly in the office market, as vacancy rates are seen to increase.

“The lockdowns, which resulted in many business contraction and closures, the flight of many of the POGOs [Philippine Offshore Gaming Operators] and the prevailing economic situation in 2021 as a result of the COVID-19 pandemic are expected to increase office space vacancy rates and soften office demand in 2021,” Lobien Realty Group (LRG) said.

LRG chief executive officer Sheila Lobien said the Metro Manila office market closed 2020 with a vacancy rate of 8 percent.

“We feel that in the next few months, this can be double digit. 12 percent to probably 14 percent vacancy rate,” Lobien said.

“That’s because many office buildings that are being vacated.The exit of POGO affected the vacancy rate here in the market,”she added.

Lower demand from POGOs

Data from LRG showed that a total of 662,861 square meters entered the market in 2020.

The property consultancy added that only 53 percent of the total supply has been leased as of the fourth quarter of 2020, meaning 313,533 sqm still remains available.

While POGO sector has been among the top drivers of office space demand in recent years, it was a different story in 2020, as gaming firms only accounted for 16 percent of office space demand, a decline from its 36 percent share in 2019.

In contrast, the Business Process Outsourcing (BPO) firms led the demand drive for office space in Metro Manila in 2020 representing approximately 41 percent, while other industries comprise about 43 percent of Metro Manila office space demand drive.

Office landlords adjusting rental rates

While Metro Manila vacancy rates are still in the single-digit levels, Lobien said office landlords are already adjusting rental rates and are offering more flexible terms with tenants.

LRG forecasts that there will also be a 25-30 percent rental rates decline starting this year.

Average rents in the Metro Manila office market closed 2020 at P1,120 per sqm, slightly lower than the P1,150 per sqm in 2019.

“2020 rental rates computations have not reflected the decrease due to the POGOs’ contractual agreements of about a year’s worth of security and advance deposits which protected the landlords’ rent income during the lockdowns and despite the numerous lease pre-terminations,” LRG said.

Apart from lower rental rates, Lobien said landlords are also accepting lower escalation rates as well as shorter term leases.

She added that while the usual lease term used to be three to five years, now landlords are now open to accepting leases as short as 12 months.

“Some spaces are fully furnished/ vacated by pogo or previous tenants- landlords are giving all that to the next taker (for free) to fast track take up,” Lobien said.

Less new supply to come in

For this year, Lobien said around 600,000-700,000 sqm is seen to come online, lower than the Pre-Covid level new office supply, which breached one million in 2018 and 2019.

“Everything was demand driven and rental rates were moving up. Everything taken up right away. Everything was taken from the BPO and the POGO industry. This year, obviously, the construction of office spaces also slowed down because of the lockdown,movement did not happen,”Lobien said.

Lobien said the delay in the completion of office spaces may also be good in a market where demand is slowing, as the available supply will be absorbed.

“And if the BPO industry will start to expand again in the second, third quarter, that’s good because the supply this year is just about another 600,000-700,000 sqm I think it’s going to be like that in the next two to three years,” she added.

Opportunities for Co-working spaces

Apart from traditional office spaces, LRG expressed optimism for opportunities in the co-working spaces sector, as these types of spaces are envisioned to be a growing feature of the new normal in workplaces.

“Startup companies, freelancers, entrepreneurs and digital nomads, and remote teams drive demand for co-working spaces,”LRG said,

At present, there are 110 Co-working spaces in Metro Manila. Total co-working spaces amount to 350,000sqm representing 9,786 total workstations available.

LRG emphasized that the global flexible office market is projected to grow at a compound annual growth rate (CAGR) of 18 percent from 2020 to 2027.

It added that Asia Pacific region is considered the fastest-growing region within the global flexible office market due to the rise of co-working centers and other styles of flexible office spaces.

LRG said among the opportunities co-working spaces can tap include BPO firms that are looking for flexible workspaces.

It added that co-working spaces also have better space distancing unlike traditional offices and offers flexibility from short to long term leases.

Despite the opportunities, there are also challenges faced by the co-working space sector such as some micro, small and medium enterprises deciding to stop operations due to COVID-19.

“Work from home arrangement became a disadvantage to co-working operators as many firms opted to operate with this arrangement instead of renting seats in co-working facilities,” LRG said.

2021 to be better year for real estate

Despite the challenges that lay before it, LRG said it forecasts that 2021 will be a better year for the real estate industry as the worst of the COVID-19 pandemic is seen to be over in light of the planned aggressive roll-out of the various COVID-19 vaccines.

“The speed and magnitude of the real estate recovery will also depend on the national government’s ability to roll-out the vaccines and rebuild the economy through the government’s monetary and fiscal policies as embodied in the Bayanihan to Heal as One Law,” LRG said.

In addition, Lobien said international investors continue to look at the Philippines for joint venture projects in other real estate asset classes such as office and residential.

“As we speak, there are many international players who are looking at the Philippines. There are several nationalities from Europe, from the US and Asia. So there are many opportunities,” Lobien said.

She added that some of them are looking to partner with big developers for office projects and mixed-used housing or condominium projects in the country.

“They still find that investing here in the Philippines is so much better compared to putting their money elsewhere in a mature market, in Europe and in the US. The margins that they will make here now in the Philippines is so much better compared to a mature market,” Lobien said.