Colliers: Office market sustained momentum amid challenges

DURING the first quarter (Q1), total office transactions in Metro Manila reached 240,100 square meters (sq.m.), 88% higher versus the same period in 2023. Traditional firms cornered 44% of total office space deals recorded in Metro Manila, followed by business process outsourcing firms (BPOs) at 33% and Philippine Offshore Gaming Operators (POGOs) at 23%.

While transactions volume has increased year on year (YoY), we noted that area size requirements of some tenant classes have decreased. For instance, the average deal size of traditional firms decreased from 800 sq.m. to 600 sq.m.

Despite sustained demand, net take-up remains muted (75,000 sq.m. in Q1 2024) in Metro Manila due to continued space surrenders due to nonrenewal and rightsizing of occupiers. In Q1 2024, we recorded 161,000 sq.m. of new surrenders, slightly higher than the average quarterly vacated space of 145,000 sq.m. in 2023. We expect this trend to persist until early 2025 as the remaining pre-pandemic leases are yet to expire.

2024 US ELECTIONS SEEN TO PAUSE NET DEMAND
The 2024 US Elections is expected to affect net take-up as the largest office space occupiers are outsourcing companies which get as much as 60% of their businesses in America. Colliers’ historical office market data has shown that over the past three pre-pandemic US Elections, office net demand peaks the quarter before the end of the elections as occupiers are signing up deals before the election has decided.

On average, net demand decreased by 30% quarter on quarter (QoQ), yet eventually recovers by 40% QoQ in the succeeding quarter of the election period.

PERSISTING HIGH VACANCY MARKET
While overall Metro Manila office vacancy marginally improved to 19% in Q1 2024, we expect this to increase to 19.6% by end-2024 given new supply completions and space surrenders. The volume of vacated spaces is expected to follow the trend of office transactions as the market is still contending with expiring pre-pandemic leases.

FLATTISH RENTAL GROWTH
Growth of headline rates in Metro Manila remains flat as we recorded an increase of only 0.6% YoY. Rental spreads (i.e the difference from headline to transacted rates) range between from 5% to as high as 30%, especially in high vacancy markets such as Bay Area.

BRIGHT SPOT IN THE COUNTRYSIDE
The countryside saw better performance during the first three months of the year. A total of 52,000 sq.m. of office deals were recorded in provincial areas, with Metro Cebu (35%) leading in terms of activity followed by Pampanga (17%) and Davao (15%).

While there is an increase in demand for office space in provincial areas, Colliers has noted that some markets have limited availability of options for outsourcing locators with typical area size requirements of 2,500 sq.m. Using our Q1 2024 data, Colliers has identified regions with high, middle, and low availability of options for a typical BPO requirement of 2,500 sq.m. Some areas identified with moderate to low supply are Bacolod, Iloilo, Cavite, Davao, Cagayan de Oro, and Dumaguete.

MAXIMIZE EXISTING MARKET CONDITIONS
The current market condition presents opportunities that both tenants and landlords can take advantage of. We encourage tenants to review their real estate as early as 18 months before lease expiry date to have a better position for a good renewal or relocation.

The leasing process has now lengthened as current hybrid policy and employee demographics have become key considerations in real estate planning. We advise that the first six months be dedicated to workplace strategy, i.e, studying utilization metrics and employee locations then the next 12 months be spent for proper site selection, landlord discussions and fit-out construction or renovation.

While landlords taper down Metro Manila supply in the next four years, refurbishment of aging properties in their current portfolio is encouraged to support market-competitive rental rates. Developers are also encouraged to assess their provincial office pipeline and ramp up the construction of ongoing projects in identified key locations with low availability of options.

Kath Taburada is a senior market analyst, while Kevin Jara is the director, both at Colliers Philippines.