Signs of recovery seen as office rents begin to bottom out

Rental rates in the Metro Manila office market have been dropping since the pandemic began due to subdued leasing and rising vacancy. While this downward trend continued in the third quarter of the year, it looks like falling rents will finally hit the bottom.

“Previously, we told everybody that the market might bottom out in the second half of this year and it looks like we’re on the way there,” Colliers director for office services Dom Fredrick Andaya said.

“So when we reach the bottom, that’s the start of the rebound already– that is already happening now and we might see a better Q1 2022,”he added.

Data from Colliers show that on average, office rents in Metro Manila declined by 5.6 percent in the third quarter of 2021 to P744 per square meter (sqm).

Colliers said it projects a further correction in rents particularly in submarkets with substantial space vacated due to lease terminations and significant amount of upcoming supply.

“In 2021, we see rents dropping by 20 percent before a gradual recovery starting the second half of 2022,”Colliers said.

“Colliers believes that office leasing recovery will hinge on ramped up Covid-19 vaccination which should enable more employees to report back to their workplaces,”it added.

The property services firm said the recovery of major economies such as the United States could play a role in sustaining demand from outsourcing firms beyond 2021.

“In our view, the successful COVID-19 vaccination has been a catalyst for the economic recovery of first-world countries and this has driven the expansion of outsourcing companies. The outsourcing business model as a strategy to survive and recover shall be utilized by many companies. The same phenomenon happened in the aftermath of the Global Financial Crisis in 2008,”Andaya said.

“As consumer demand recovers and strengthens, occupiers from e-commerce, healthcare, financial services, and communications segments should explore consolidation, relocation and expansion opportunities within and outside of Metro Manila,”he added.

Negative takeup declining
Andaya reported that negative takeup in the third quarter totaled to -21,000 sqm, smaller compared to the -86,000 sqm negative takeup in the previous quarter. This brought total negative takeup in the nine months of the year to -143,000 sqm.

“So these are proof that we might hit the bottom already,”Andaya said.

Data from Colliers showed that there were 302,600 sqm worth of office transactions in the third quarter, only two percent higher than the 295,800 sqm recorded in the same period last year.

“Traditional occupiers covered 61 percent of the total transactions in the nine months of 2021 followed by outsourcing firms,”Colliers said.

Among the companies that took up space during the period include Shopee, Chinabank, Grab Philippines, Asian Carmakers, Nu Skin Philippines and other logistics firms.

Most of these tenants took up space in Ortigas CBD and Fort Bonifacio,according to Colliers.

The property services firm said office spaces in Metro Manila continue to be vacated, however, at a slower pace compared to the previous quarter, with 94,000 sqm of office space being vacated in the quarter, lower than the 197,000 sqm of vacated space in the second quarter.

It added that as of the nine months of the year, total vacant office space was at 1.8 million sqm, equivalent to a 13.9 percent vacancy as of the end of the third quarter, higher than the 12.7 percent in the previous quarter.

Colliers said the Bay Area, Makati CBD and Makati Fringe recorded substantial vacancies.

“As occupiers continue to vacate office space in Metro Manila and pre-commitment levels of upcoming buildings remain tepid, Colliers retains its vacancy forecast of 15.6 percent by the end of 2021,”it added.

For this year, Colliers said it projects negative takeup to hit -167,200 sqm.

“Colliers sees a potential rebound in office space absorption in 2022, partly influenced by a more optimistic business sentiment in the next 12 months,” the property service firm said.

“The central bank’s Business Expectations Survey (BES) in Q3 2021 noted that the availability of more vaccines, easing of lockdowns, and improving economic conditions are likely to support an improvement in business activities,”it added.

New supply enters the market
Colliers reported that around 156,600 sqm of new office spaces were completed in the third quarter of the year, 102 percent higher than the 77,700 sqm in the same period last year.

Among the new buildings completed during the quarter include Park Triangle Tower North in Fort Bonifacio and Bridgetowne East Campus in Ortigas Fringe.

Other completed office buildings include the  8912 Aseana Building, Harton Corporate Center and Four E-com Center Tower 2, which brought the Bay Area’s total office stock to over one million square meters.

Despite the large amount of new supply entering the market, Andaya said that they have observed a decline in the completion of office spaces by developers.

“For example, for this year we were supposed to see 850,000 sqm to be completed, but around 11 percent were already delayed to 2022,”Andaya said.

“And we’re seeing that developers are slowly managing their pipeline.But I hope this will not compromise their ability to tap the opportunities when the market starts rebounding in 2022,”he added.

For this year, Colliers said it forecast new supply reaching 749,700 sqm, 12 percent lower than its previous forecast of 847,600 sqm.

Andaya said new supply in 2022 is projected to total to around 700,000 sqm.

“From 2020 to 2023, we see the average annual completion of about 611,900 sqm of new supply,”Colliers said, adding that the Bay Area, Fort Bonifacio, Ortigas CBD, and Quezon City are likely to account for 66 percent of the new supply.

Occupiers urged to explore flexible options

As some companies still remain in a wait and see stance, Colliers believes that these occupiers should explore the viability of short-term leases.

“We have observed some multinational companies (MNCs) opting for short-term renewals and considering flexible workspaces. Colliers believes that flexibility will play a crucial role in a firm’s business continuity plan,”Colliers said.

It added that among the locations with significant amount of vacant flexible workspaces are Makati CBD and Fort Bonifacio.

Similarly, property services firm Jones Lang Lasalle (JLL) Philippines also highlighted the need for flexibility as many occupiers are pushing office re-entry timelines to 2022.

“Many are still uncertain about their space requirements in the coming years, with some already piloting hybrid work setup, and this will push a lot of the leasing decisions up until the fourth quarter, or even next year,” said JLL Philippines head of research and consultancy Janlo de los Reyes.

“It’s still going to be a continuous fluid environment that the real estate market will be in. Flexibility and agility, which has been a recurring theme across different sectors, will serve as key instruments in treading uncertainties in the market,” de los Reyes said, referring to his outlook for next year.

For his part, Cushman & Wakefield Philippines Director and Head of Research, Consulting & Advisory Services Claro Cordero urged occupiers to revisit their workspace strategies.

“Corporates are advised to revisit their respective workplace strategy to firm up and identify future real estate requirements to take advantage of the flexibility being offered by several landlords and operators. Corporate occupiers need to work on planning the long-term occupancy trends that will be able to attract/inspire the employees and the talents to move back to the physical office spaces,”Cordero said.