Future-proofing PH office market amid rising vacancies

Last of two parts

Office developers should proactively offer flexible and creative lease structures for both existing and new tenants in their portfolio.

Over the past three months, a number of traditional firms have implemented a mix of non-renewal and pre-termination of their leases. 

Given this, retention of existing tenants in a landlord’s portfolio as well as securing new leases from new clients are important to most developers today.

Landlords may achieve this by engaging in early renewal discussions with their existing tenants and providing creative renewal terms and other special concessions that will enable them to retain high occupancy in their buildings.

In our view, developers that also provide tenant improvement or fit-out allowance will be able to attract new occupiers in their portfolio.

Consider tenant engagement activities to promote return-to-office

As companies are now encouraging their employees to return to the office, landlords have a role to play in rekindling the attractiveness of the return-to-office (RTO) set-up, which can be done through tenant engagement events that promote the well-being of employees. Landlords may take advantage of creating events around the coming holidays. They may also partner with brands to further excite employees and entice them to RTO.

Amplify flight-to-value strategy

Based on Colliers’ Q3 2023 data, several companies implemented flight-to-quality/cost strategies. 

Among these are traditional and outsourcing firms that took up spaces in Fort Bonifacio, Makati CBD, and Ortigas CBD. These firms took advantage of a market that remains tenant-leaning and maximized the opportunity to lease new, high quality office spaces in major business districts at lower rental rates.

Colliers believes that given the prevailing market conditions, opportunities remain for tenants to implement flight-to-quality strategies at a lower cost due to decreased rental rates brought about by the pandemic. 

In our view, now is an opportune time to secure space in locations with substantial supply of new and quality office spaces. Given the current stock of vacant spaces and new office towers to be completed in the next 12 months, we encourage tenants to consider office spaces in Fort Bonifacio and Ortigas CBD. 

Occupiers may also consider flexible workspaces in their flight-to-value strategy. Colliers encourages occupiers to review their real estate strategies ahead of lease expiry to take advantage of high vacancy in the market, especially with our still-elevated forecast for 2023 and 2024.

Cater to growing demand outside Metro Manila

In the first nine months of 2023, Colliers recorded 149,500 sqm of transactions outside Metro Manila, up from 145,000 sqm posted a year ago. 

Colliers recommends that developers complete delivery schedules of their projects as we have observed increasing inquiries from outsourcing firms especially in Iloilo, Bacolod, Bulacan, Cagayan de Oro, and Laguna. 

We also encourage developers to be on the lookout for potential demand in key cities such as Iligan, Dagupan, Urdaneta, Malolos, General Santos, Tarlac, Cabanatuan, and Puerto Princesa as these locations are touted as high potential areas for transformation into “digital cities” by 2025 according to the Information Technology and Business Process Association of the Philippines (IBPAP).

Colliers has also received leasing queries in these areas. In our view, the challenge for these cities is to sustain or further raise their competitiveness to remain on the radar of new and expanding IT-BPM locators. These localities should improve their infrastructure backbone, business registration systems, and disaster resiliency to corner a bigger slice of the outsourcing pie.

Explore alternative 

sites for BPOs

Both landlords and business process outsourcing (BPO) tenants should start looking for expansion sites outside of Metro Manila, especially as the government encourages businesses, including outsourcing firms, to set up outside Metro Manila. 

Colliers recommends that developers carefully assess the viability of building new office towers in emerging BPO hubs outside Metro Manila. While vacancies for certain provinces may seem elevated, there are submarkets or business districts in each city that may require new office spaces given the limited availability of new and quality buildings.

Proactively seek new tenants from economic measures 

In our view, the passage of economic reforms such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law, amendments to the Foreign Investments Act (FIA), Retail Trade Liberalization (RTL), and the Public Services Act (PSA) should have a positive impact on the country’s investment climate. 

The relaxed investment requirements, reduced corporate income tax rates and increased foreign ownership will likely lead to greater demand for office space in the country. 

Colliers recommends that landlords seize opportunities from these legislative measures and secure leases especially from expanding multinational and outsourcing firms. They should carefully assess the size and fit out requirements of potential tenants. 

Foreign entrants, meanwhile, should explore office options in established business districts such as Makati CBD and Fort Bonifacio (Prime and Grade A buildings) for their local headquarters operations.