Expansions, upgrades fuel Manila office market

THE Metro Manila office market performed better than expected compared to our initial projections. Net take-up in 2023 more than doubled compared to the previous year, with transactions continuing to outpace lease surrenders. Despite new supply driving its marginal increase, the vacancy posted as of the end 2023 has averted the 20-percent level. Colliers continues to note deals from traditional and outsourcing firms implementing a mix of flight-to-quality and flight-to-cost measures. The office market has also seen more expansions (50% of transactions) and new entrants (10% of transactions).

Colliers encourages occupiers to continue taking advantage of the current market conditions and investing in modern workspaces for the benefit of their employees. With sustainability now becoming a minimum requirement, landlords are encouraged to incorporate green features and secure certifications in both existing and future developments. Some landlords with presence in better performing submarkets may consider building more high-quality and green spaces to capture future demand.

TRANSACTIONS UP 37%
As of the end of 2023, office space deals across Metro Manila reached 827,700 square meters (8.9 million square feet), up 37% from the 603,800 sq.m. (6.5 million sq.ft.)  recorded a year ago. This figure is already more than half the 1.5 million sq.m. (16.1 million sq.ft.) recorded pre-Covid or in 2019. Traditional firms led transactions, accounting for 46% of the total while outsourcing and Philippine Offshore Gaming Operator (POGO) firms cornered 34% and 20%, respectively.

The Bay Area, Quezon City, and Makati central business district (CBD) dominated in terms of transactions in 2023, accounting for more than half of the total transactions in the capital region. Among the notable deals in Q4 2023 include spaces occupied by Samsung in Fort Bonifacio, Foundever in Ortigas Fringe, Optum in Makati CBD, and Fluor in Alabang. Colliers has also observed substantial deals from POGO firms especially in the Bay Area.

NET TAKE-UP EXCEEDS FORECAST
Vacancy as of end-2023 reached 19.3%, marginally higher than the 18.7% recorded in the third quarter (Q3) of 2023, due to the delivery of new office buildings and space surrenders from non-renewals and pre-terminations. In 2024, vacancy is projected to reach 19.6% due to low pre-commitment levels in upcoming buildings and expected surrenders from pre-pandemic leases.

We recorded 279,800 sq.m. (3.0 million sq.ft.) of net absorption in 2023, higher than our initial forecast of a 220,000 sq.m. (2.4 million sq.ft.) net take-up and the 110,500 sq.m. (1.2 million sq.ft.) recorded in 2022. Colliers is optimistic that net absorption will gradually improve in 2024 as we continue to receive inquiries for new setups, expansions, and relocations within and outside the capital region. In 2024, we project net absorption to reach 336,000 sq.m. (1.6 million sq.ft.).

TAPERED NEW SUPPLY
In 2023, Colliers recorded the completion of 611,700 sq.m. (6.6 million sq.ft.) of new office space, lower than the 736,100 sq.m. (7.9 million sq.ft.) completed in 2022. In Q4 2023 alone, about 279,600 sq.m. (3.0 million sq.ft.) of new supply became online with the delivery of the International Finance Center and Uptown East Gate in Fort Bonifacio, Trium Square in Pasay and Global Business Tower and SM Fairview Tower 3 in Quezon City. In 2024, we expect new supply to reach 598,300 sq.m. (6.4 million sq.ft.). We see the Bay Area, Quezon City, and Alabang covering nearly half of the new supply. From 2024 to 2026, Colliers sees the annual delivery of 470,400 sq.m. (5.1 million sq.ft.) of new office space, lower than the 607,700 sq.m. (6.5 million sq.ft.) completed annually from 2020 to 2022 as developers remain cautious of their respective portfolio vacancies.

ACTIVATE FLIGHT-TO-VALUE STRATEGY
Based on Colliers’ Q4 2023 data, 40% of transactions were driven by relocations. Out of these relocations, 60% implemented flight-to-quality/value strategies. Among the firms that took up space are traditional, shared services and third-party outsourcing companies in Fort Bonifacio, Makati CBD and Ortigas CBD.

Colliers encourages tenants planning to expand operations and occupy larger space to take advantage of newly completed office buildings in these business hubs that offer rental discounts. In our view, employers should also consider these office towers’ proximity to their employees’ residences and transportation hubs, especially those that require a larger fraction of their workers to return to office (RTO).

Incorporate green features and consider certifications to corner sustainability requirements

With sustainability becoming a minimum requirement for office tenants, 327,100 sq.m. (3.5 million sq.ft.) of office space were recorded in green buildings with LEED, EDGE, WELL, and BERDE certifications or pre-certifications in 2023. This is 36% higher compared to 240,000 sq.m. (2.6 million sq.ft.) transacted in 2022. Given the heightened importance of sustainability in occupiers’ office requirements, landlords are encouraged to incorporate green features into their portfolios. This may be done through retrofitting, shifting to renewable or clean energy and implementing efficient water systems as well as securing certifications to ensure baseline standards are met.

CAPTURE DEMAND FOR FLEXIBLE WORKSPACE
The flexible workspace market vacancy reached 16.7%, higher than the 11.9%  recorded in 2022. While vacancy is mainly driven by the expansion of notable providers such as KMC Solutions and Regus, this remains to be an improvement from the 40% vacancy posted in 2020, at the peak of Covid disruptions.

Colliers continues to see inquiries for flexible workspaces from occupiers. Some notable industry profiles of flexible workspace users are contact centers, multinational companies, software development firms as well as shipping, startup and fintech firms. Colliers recommends that occupiers look for new and high-quality workspaces, especially in major business districts such as Makati CBD, Fort Bonifacio, and Ortigas CBD that provide tenants with flexible workspace options. For occupiers considering opening provincial microsites for their employees, Colliers recommends that they partner with serviced office providers.

With the continued clamor for hybrid work arrangements, Colliers encourages landlords to offer non-traditional leases (i.e., flexible workspace scheme) in their office buildings to capture this demand, which may be done through joint venture agreements with serviced office providers.

Kevin Jara is associate director for office services – tenant representation at Colliers Philippines.