Office transactions in 9M 2022 rose by 72 percent year-on-year.
The improved leasing activity indicates that the Metro Manila office market is sustaining its recovery. After two consecutive years of negative net take-up, we see net absorption reverting to positive territory in 2022.
Outsourcing and traditional firms continue to lead office space absorption within and outside of Metro Manila. We see a further correction in rents this year before bottoming out in 2023. Vacancy increases will continue to be supply-driven, with Quezon City and Fort Bonifacio dominating new completion.
Our forecast for a gradual market recovery in view of market headwinds (e.g. increased work-from-home [WFH]) should compel developers and tenants to zero in on opportunities.
Developers should look at the benefits of partnering with flexible workspace operators while highlighting their buildings’ sustainable features. Tenants should continue implementing flight-to-quality, taking advantage of newer buildings offering discounted rates and incentivizing employees to return to the office.
Take advantage of rental corrections and prevailing market conditions
Office rents in Metro Manila have dropped by 35 percent since 2020. In our opinion, this should encourage occupiers to employ flight-to-quality measures as well as secure early renewals in business districts such as Makati CBD, Bay Area, Ortigas CBD and Fort Bonifacio where substantial, and quality new supply is also available.
Landlords, on the other hand, should be mindful of differing vacancy dynamics across submarkets and continue to provide concessions such as delayed escalations, rent-free and extended fit-out periods to entice and retain tenants.
Tap the demand for flexible workspaces
Due to changes in the WFH regulations of the government, Colliers forecasts increased demand for flexible workspaces. We recommend that flexible workspace operators expand to capture demand from smaller space requirements as well as hybrid work models such as hub-and-spoke. As of end-Q2 2022, flexible workspace vacancy in the capital region was 20 percent, down from 38 percent in Q2 2021. Submarkets with significant seats available include Makati CBD, Fort Bonifacio and Quezon City. Colliers encourages landlords to consider partnering with flexible workspace operators.
Tenants, meanwhile, should include flexible workspaces in their real estate strategies as they implement hybrid work arrangements.
Prioritize sustainable Building features
In Colliers Philippines’ report titled, Forging Smarter and Greener Buildings, we highlighted that property developers are increasingly taking steps to address climate change by “embracing available advanced technologies.”
To further promote sustainability, developers are taking advantage of the globally recognized green building certifications to reduce their properties’ environmental impact and to satisfy occupiers’ Environmental, Social and Governance (ESG) standards. Colliers believes that the future of office buildings leans toward developing spaces which are safer, healthier and are less harmful to the environment.
Colliers has also observed that some discerning occupiers prefer or require ESG certified office space. Landlords should be proactive in capturing this demand. In 9M 2022, about 20 percent of the transactions were in LEED-certified buildings.
Pared down completion
In Q3 2022, Colliers recorded the delivery of 102,700 square meters of new office space. This is lower than the 146,700 sqm completed a quarter ago and the 156,600 sqm delivered in Q3 2021. In Q4 2022, we expect new supply to reach 228,300 sqm.
This should bring new supply for 2022 to 783,900 sqm, up from 633,900 sqm in 2021. The lower-than-expected new supply compared to our previous forecast of 808,900 sqm was due to developers pushing back their projects because of supply chain issues, while others prioritize filling vacancies in their existing buildings.
From 2022 to 2026, we see annual completion at 593,400 sqm, with close to half of that in Quezon City, Fort Bonifacio and Ortigas CBD.
Transactions up 72 percent
As of 9M 2022, office transactions reached 495,600 sqm, up 72 percent compared to the 288,300 sqm in 9M 2021.
We see more occupiers executing flight-to-quality strategies and locking in spaces in central business districts (CBDs) such as Fort Bonifacio, Makati CBD and Ortigas CBD. In Q3 2022 alone, office deals reached 168,700 sqm, higher than the 69,400 sqm a year ago.
Outsourcing firms led office space transactions in Q3 2022 followed by traditional occupiers.
Some of the notable deals during the quarter include American Express, WNS, Chiyoda, Wells Fargo and Infosys. These firms occupied spaces in Fort Bonifacio, Ortigas Fringe and Ortigas CBD.
In September, the Philippine Fiscal Incentives and Review Board (FIRB) has allowed Information Technology and Business Process Management (IT-BPM) companies in ecozones to adopt a 100 percent WFH arrangement while retaining their tax incentives.
In our view, this is likely to stifle office demand in Q4 2022. Occupiers are taking a wait-and-see stance as the resolution’s Implementing Rules and Regulations (IRR) have yet to be finalized.
Meanwhile, the government is willing to support “new modes of deploying workers to support the Philippine IT-BPM sector’s growth.” Stakeholders should also monitor the provisions of the proposed bills amending Philippine Economic Zone Authority (PEZA) and the CREATE Acts allowing hybrid and flexible work arrangements for ecozone locators.
Provincial deals accounted for 23 percent of total transactions across the country, with deals reaching 145,000 sqm from only 82,000 sqm in Q2 2022. Cebu, Davao and Pampanga cornered 85 percent of the transactions with outsourcing firms dominating take-up.
Vacancy stable at 17.7 percent
Vacancy was steady at 17.7 percent in Q3 2022 due to the sustained level of transactions from outsourcing and traditional firms. However, the low pre-commitment levels from upcoming buildings is likely to push vacancy to 19.5 percent in 2022 from 15.7 percent in 2021.
Meanwhile, net take-up in Q3 2022 reached 29,700 sqm, slightly lower than the 45,100 sqm of net absorption in Q2 2022.
As of the end of 9M 2022, net take-up reached 99,400 sqm.
Colliers now revises its net take-up forecast in 2022 to about 140,000 sqm, lower than our initial forecast of 350,000 sqm.
Despite lower projections, the 2022 net take-up is still an improvement after the Metro Manila office market posted two consecutive years of negative net absorption.
Rents to bottom out in 2023
On average, lease rates in Metro Manila dropped by 1.9 percent quarter-on-quarter, slower than the 2.6 percent decline in Q2 2022. From 2020 to Q3 2022, Metro Manila lease rates have corrected by 35 percent.
In our view, rents are likely to decline by another 10 percent in 2022 before bottoming out in 2023.