As business and knowledge process outsourcing firms drive leasing growth well into 2019, demand for office spaces by cost-sensitive call centers may be curtailed by the slow release of Philippine Economic Zone Authority (PEZA) proclaimed office buildings. To benefit from the opportunities in the sector, Colliers International urges developers to enact strategic land banking near Manila subway stations, push PEZA zone applications, and target non-outsourcing tenants while PEZA applications are pending. In addition, flexible workspace operators should assertively differentiate their respective offerings.
Colliers records more than 370,000 square meters of net take-up in Q4 2018, surpassing the initial projection of 344,000 square meters, 31 percent higher year-on-year. Total net take-up for 2018 reached 1.18 million square meters — a record-high for Metro Manila, where the amount surpassed Colliers’ initial projection of 1.15 million square meters. Strong demand is expected to continue in 2019 as there are buildings to be completed over the next 12 months. Based on Q4 2018 pre-commitment status, Alabang, Makati CBD, Fort Bonifacio and the Bay Area are expected to record the strongest take-up in 2019. Net take-up is projected at around 900,000 square meters per annum from 2019 to 2021 with projected demand moving in step with new supply. Over the next 12 months, Colliers sees the delivery of nearly 1.2 million square meters of new office space and net take-up of about 1 million square meters (10.7 million square feet) and should yield a vacancy of 5.0 percent by the end of 2019.
Outsourcing to stay and grow
Leading the demand from outsourcing occupants, Knowledge Process Outsourcing (KPO) firms cover 27 percent of new take-up in 2018 or about 381,000 square meters (4.1 million square feet). Among the KPO companies that occupied space in Q4 2018 are Infosys and AECOM. Colliers sees the KPO sector driving office demand in the next 12 months while the entry and expansion of Amazon and Google signify that Metro Manila is able to successfully compete for major KPO business.
Quezon City surprises
Quezon City accounted for 40 percent (152,000 square meters or 1.6 million square feet) of new office supply in Metro Manila for Q4 2018, the first time in 11 quarters that the city accounted for the bulk of new supply. The Araneta Cyberpark Tower 2 by Araneta Center Inc. (70,500 square meters or 759,000 square feet) is among the newest buildings in Quezon City. This also includes Vertis BPO Phase 3 by Ayala Land Inc., Robinsons Zeta Tower by Robinsons Land, and Mpire Center by Mpire Development Corporation. Araneta Center accounted for 60 percent of Quezon City’s new office stock with Vertis North covering 34 percent.
The delivery of a new building in Quezon City indicates the growing interest in the city. Colliers sees more aggressive development after the ground breaking for the first three subway stations (Quirino Highway Station, Mindanao Avenue Station and North Avenue Station), the completion of Metro Rail Transit (MRT) 7 which extends to San Jose del Monte in Bulacan, as well as clarification from the local government regarding offshore gaming processes.
Healthy pipeline to 2021
From 2019 to 2021, Colliers estimates the completion of 950,000 square meters (10 million square feet) annually. The figure is actually more than double the 450,000 square meters of new supply completed per year from 2012 to 2016. During the three-year period, Colliers expects that Fort Bonifacio, Ortigas Center and Manila Bay Area to account for 54 percent of the new supply.
Vacancy below 6 percent
Metro Manila recorded a vacancy of a rate of five percent in 2018, which is in line with Colliers’ initial forecast. The sustained take-up from a diversified group of occupants should keep vacancy at around five percent over the next 12 months. Office space due to be completed over the next 12 months is 28 percent pre-leased as of end-2018. Colliers recorded a vacancy rate of five percent in Metro Manila in 2018, which is in line with its initial forecast. The sustained take-up from an enhanced gathering of tenants should keep opportunity at around five percent throughout the following year. At the end-2018, 28 percent office space is pre-leased and is due to be completed over the next 12 months.
Rents continue to rise
The office spaces in Prime and Grade A in Makati CBD and Fort Bonifacio continue to command the most expensive rents, ranging from P930 per square meter to P1,900 per square meter as of Q4 2018. Projecting a tight market from 2019 to 2021, Colliers expects average rents across Metro Manila to rise by eight percent per annum on average. The continued take-up of space from KPO firms that locate in new, high-quality office space and offshore gaming firms willing to pay a premium to occupy space should withstand a healthy rise in rent rates.
In light of the current market, Colliers recommends the following measures:
Accelerated PEZA proclamation and ex-Manila expansion
To sustain the outsourcing sector’s growth, Colliers encourages the government to advance the approval of PEZA applications and appeals on stakeholders such as developers and qualified occupants to aggressively call for the proclamation of PEZA spaces in Metro Manila and provincial areas.
BPO tenants have been looking for PEZA-proclaimed spaces in areas outside Metro Manila to enjoy both tax and non-tax incentives. Among the more viable alternative sites are Cavite, Cebu, Bacolod, Iloilo, Clark and Davao. About 1.4 million square meters is offered by a combination of these locations of PEZA-proclaimed space in which only a tenth has been occupied. Vista Hub BPO Molino in Cavite was recently declared a special economic zone.
Target non-outsourcing tenants
Colliers encourages developers with pending PEZA applications to start targeting conventional and non-BPO firms that have been developing across Metro Manila. The country’s budget secretary is expecting gross domestic product development (GDP) growth of 7 to 8 percent from 2019. This, combined with a strong macroeconomic backdrop, should bolster the development of these organizations and eventually force these firms to occupy larger offices.
Lock-in pre-selling rates and space in new office buildings
Take-up from traditional (non-outsourcing tenants that include adaptable workspace operators and even government agencies) and outsourcing firms are seen to remain strong. Tenants with immediate office space requirements should consider new structures that are projected to be finished in Fort Bonifacio, Ortigas Center and Manila Bay area in the following year.
Consider new space in Quezon City
About 20 to 30 percent of the office space in Quezon City is cheaper compared to space in the Makati CBD, Manila Bay Area and Fort Bonifacio. Cost-conscious tenants looking for cheaper rent rates are encouraged by Colliers to consider Quezon City as the area’s proximity to Caloocan, Malabon, Navotas, and Valenzuela (CAMANAVA) region and the Bulacan areas make it an attractive area, especially for outsourcing organizations looking to tap into the labor pools in Northern Metro Manila and Central Luzon.
Flexible workspace operators should differentiate
Given the stiff competition in the market, Colliers encourages flexible workspace operators to differentiate and consider incorporating wellness and lifestyle classes, as well as food and beverage outlets. The concept of co-living is something that operators should seriously consider offering in 2019. Flexible workspace operators should be more open in partnering with developers of hotels, malls, residential towers and condominiums marketed to professionals.