Despite slower economic expansion in 2018, the Philippine real estate industry remained resilient as a result of strong demand in its major segments, especially from the office space market that posted the highest recorded take-up in history last year. The upward trend in the office segment is expected to continue this 2019, bringing more confidence for the industry to sustain its growth and achieve another robust year. 

With favorable demographics and the expanding middle-class population, Metro Manila has seen the biggest interest for setting up offices. According to real estate consulting firm Pronove Tai International Property Consultants, 32 new buildings or 845,000 square meters (sq.m.) supply were completed in Metro Manila last year, growing the region’s stock or total existing space by 9% year on year (YoY).

As of Dec. 31, 2018, the Metro Manila office market has a total stock of 10.6 million sq.m. Makati City remained the largest office district with 3.4 million sq.m. share or 32% of the region’s total office stock, followed by Taguig City at 21% and Ortigas Center at 16%.

Among these largest office districts, Taguig City delivered the highest supply in the last four years at an annual average of 280,000 sq.m. Pronove Tai Chief Executive Officer Monique Cornelio-Pronove said that it is inching its way closer to Makati City as it continues to build more.

In terms of demand, Pronove Tai reported that the actual take-up of office spaces in 2018 grew by 22% to 1.1 million sq.m. from 875,000 sq.m. in the previous year.

Information-technology and business-process management (IT-BPM) remains a top demand driver, accounting for 490,000 sq.m. or 46% share of the total leasing transaction. Traditional offices had a second strong showing at 312,000 sq.m., a 67% jump from 2017 transactions.

Despite recording a slight decline from last year due to lack of space in their preferred locations, the Philippine Offshore Gaming Operators (POGO) came as third demand driver at 229,000 sq.m. It is followed by flexible workspaces that posted a significant growth of 258% YoY from 10,000 sq.m. in 2017 to 37,000 sq.m. in 2018.

Due to the strong office space demand, an overall unhealthy vacancy level of 4% in Metro Manila was observed.

Of the seven office districts, only Taguig City had a considerably healthy vacancy level at 7%, according to Pronove Tai. Muntinlupa City logged 3% vacancy, while Makati City and Ortigas City both recorded 1%.

The Bay Area booked the tightest vacancy at 0.4% on the back of strong POGO take-up. In 2018, this office district straddling Pasay City and Parañaque City recorded the best-performing rental growth at 19% YoY.

Quezon City and Mandaluyong City, on the other hand, continued to register high vacancy at 13% and 10%, respectively. The considerable healthy vacancy level is 5%-7%.

“We would like to draw attention to Quezon City which ended 2018 with the highest vacancy,” Ms. Cornelio-Pronove said, noting that the city is slated to deliver the highest supply of 343,000 sq.m. of new office buildings developed largely by SM, Ayala, Eton, and Araneta Group in 2019.

“As such, we see rents and capital values in the district to be pressured,” she said.

Meanwhile, the booming office space market also goes beyond the walls of Metro Manila. Leechiu Property Consultants (LPC), a professional real estate brokerage services company in the Philippines, said that the ever-growing IT-BPM industry impacts acceleration of developments not only in metro, but all over the country.

The firm said that the efforts of the national government to fund infrastructure projects positively impact nearby cities in Metro Manila such as Cavite, Laguna, and Pampanga as these cities become more accessible.

Clark, for instance, recorded the largest office demand outside Metro Manila with 156,000 sq.m., the majority of this demand was in Udenna’s famed Clark Global City.

The firm also noted that Cebu continues to be one of the options of IT-BPM companies expanding outside Metro Manila in which office supply is expected to increase by 45% within the next six years.

Moreover, despite Martial Law status, Davao regained traction in the fourth quarter of 2018, generating 28,000 sq.m. to the office demand.

By and large, data from LPC showed that the office demand in the country for 2018 reached a record-high of 1.5 million sq.m., with Metro Manila accounting for 73% or 1.16 million sq.m. (inclusive of pre-commitment transactions done by tenants for future supply).

Heading into 2019, real estate consulting services firm Colliers International Philippines is expecting the delivery of nearly one million sq.m. of new office space and net take-up of about 910,000 sq.m.

“This should yield a vacancy of 5.3% by end-2019. About 30% of office space due to be delivered in 2019 is pre-leased. Based on 3Q2018 pre-commitment status, we expect Alabang, Makati CBD, Fort Bonifacio, and the Bay Area to record the strongest take up in 2019,” Colliers wrote in its Top 10 Forecast for 2019 report.

And with the continued rise of micro, small, and medium enterprises (MSMEs); the influx of multinational corporations (MNCs) and outsourcing firms looking for plug-and-play offices; and the implementation of a set of policy reforms likely to improve the business climate, Colliers sees Manila’s flexible workspace stock to grow by at least 10% per annum over the next three years.

“Due to stiff competition in the market, we see flexible workspace operators differentiating their features. A number of operators are already incorporating yoga and art classes, gyms, and food and beverage outlets. We believe that co-living is another feature that flexible workspace operators in Manila should consider in 2019,” Colliers said. “Over the next three years, we expect more flexible workspaces to be offered in malls, hotels, and dormitories for professionals.”

For its part, the LPC believes that 2021 will be a milestone year in infrastructure development that would greatly help decongest Metro Manila and open up transportation arteries to the rapidly rising regional centers outside the region including Clark, Cavite, Laguna, and Batangas.

However, the firm projects that the office supply will sharply decline by 2021 and a deficit is forecasted in the following year. Thus, developers are encouraged to complete new projects by 2022 and beyond. — Mark Louis F. Ferrolino