Maximizing opportunities: Landlords, tenants face precarious office market

METRO MANILA office vacancy remains elevated due primarily to continued completion of new office buildings and the implementation of hybrid work arrangements. Rents continue to drop and is expected to bottom out by end-2023.

We saw a marginal rise in Metro Manila transactions but deals outside the capital region plummeted by more than a third.

Despite more optimistic forecasts from industry groups, the office market continues to face headwinds which could further derail our projected recovery in terms of net absorption, vacancy, and lease rates.

Colliers believes that landlords and tenants should continue seizing opportunities within and outside Metro Manila.

Landlords should continue offering concession to firms especially amid a tenant-leaning market. This is also important to achieve optimal levels of occupancy despite elevated vacancies.

Tenants, meanwhile, should take advantage of rental corrections in selected business districts and continue employing flight-to-value strategies.

RECOMMENDATIONS:
Proactively offer flexible, creative lease structures
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 the landlord’s portfolio as well as securing new leases from new clients are important to most developers today.

Landlords may achieve this by engaging on early renewal discussions with their existing tenants, 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.

Take advantage of prevailing market conditions
With the existing tenant-leaning market, Colliers believes that now is an opportunity for tenants to implement flight-to-value strategies by locking in spaces in locations with substantial supply of quality office spaces.

Occupiers should review their real estate plans as early as 18 months prior to their lease expiry to be able to capitalize on the high vacancy rates, especially newly completed, quality office spaces.

Tapered new supply
In the first quarter of 2023, Colliers recorded the completion of 48,000 square meters (sq.m.) of new office space, with the delivery of PMI Tower in Makati Fringe and Savya Financial Center South Tower in Arca South.

By the end of 2023, we project the completion of 569,100 sq.m. of new supply, down from our previous forecast of 641,100 sq.m. as some developers delay completion of their buildings due to muted pre-commitment. Ortigas central business district (CBD), Quezon City and the Makati fringe area are likely to account for close to 60% of the new supply in 2023.

From 2023 to 2025, we expect about 506,300 sq.m. of new office space to be completed annually, only close to half of the 996,600 sq.m. delivered per annum pre-COVID (2017 to 2019).

Metro Manila transactions up 6%
In the first quarter of 2023, office transactions in Metro Manila reached 117,500 sq.m., up by a mere 6% from the 111,200 sq.m. of deals recorded in the fourth quarter of 2022.

However, this figure is down 27% from the 160,700 sq.m. posted a year ago. Transactions slowed year on year due to the paper transfer of Philippine Economic Zone Authority (PEZA)-registered enterprises to the Board of Investments (BoI) to allow IT-BPM companies to work from home.

Traditional firms accounted for more than half (56%) of the total transactions. By submarket, Ortigas CBD, Fort Bonifacio and Quezon City posted the largest volume of transactions as some outsourcing firms (both newly set up and expanding ones) took up spaces with sizes ranging from 1,000 to 13,000 sq.m.

Among the notable transactions in the first quarter of 2023 include: Telus in Quezon City, Work.Able in Ortigas CBD, Cagayan Economic Zone Authority (CEZA) and AC Energy (ACEN) in Makati CBD and IGT Solutions in Alabang.

PROVINCIAL DEALS DOWN 37%
Office deals in the provinces declined in the first quarter of 2023. Colliers recorded 29,200 sq.m. of transactions during the quarter, 37% lower compared to the 46,300 sq.m. posted a year ago.

Cebu continued to dominate, followed by Pampanga, covering 55% and 36% of total provincial transactions, respectively.

In 2022, data from the Information Technology and Business Process Association of the Philippines (IBPAP) showed that the country’s industry headcount and revenues reached 1.57 million and $32.5 billion (P1.8 trillion), a 10.3% and 8.4% annual growth, respectively.

IBPAP noted that the increase in headcount may be attributed to the growth in the banking, financial services, healthcare, technology, retail and telecommunications sectors.

Meanwhile, about 70,000 jobs were generated in Cebu, Davao, Pampanga, Bacolod and Laguna, with provincial full-time employees (FTEs) now reaching 486,000, or 31% of the industry’s total headcount.

In 2023, the IBPAP is projecting the country’s IT-BPM industry headcount to reach 1.7 million with revenues estimated to reach $35.9 billion (P2 trillion).

Kevin Jara is the associate director for tenant representation at Colliers Philippines.