The state of Philippines' office leasing during COVID-19
Aug 11, 2020

Like many nations around the world, the COVID-19 crisis has impacted the economy of the Philippines considerably. Since President Duterte placed Metro Manila under Community Quarantine last March 15, the decline of the economy became inevitable. In the 1Q of 2020, government consumption growth fell to 7.1% from 17% in the 4Q of 2019. Private investment growth declined at 4.3% as durable equipment contracted for the fourth consecutive quarter on poor business sentiment while construction growth fell at 3.4%. Import growth slid by 9% and export growth fell to 3% in 1Q 2020. More contraction in the Philippines’ growth on 2Q 2020 is seen as the impact from the coronavirus containment measures continues to face difficulties. The Asian Development Bank’s (ADB) full year GDP growth has even altered its forecast in 2020, plummeting to -3.8% from an earlier forecast of 6.2% due to COVID-19, even as it is expected to increase in 2021 to 6.5%.

According to Lobien Realty Group (LRG), one of the fastest rising real estate consultancy firms in the Philippines, the country’s Real Estate Industry has not escaped the economic onslaught brought by the pandemic, as shown by the current performance of the Office Leasing Market. Nonetheless, LRG remains hopeful of its prospects for the future.

While the Philippine economy is very sensitive to political, natural, and global financial risks, it has proven to be very resilient–with recoveries posted after every challenge. The same goes for the Office Market. Due to COVID-19 causing ADB’s 2020 GDP reforecast of -3.8%, Office Rental Rates will decline but will gradually recover. GDP Construction percentage was rising steeply in 2019, reflecting the confidence of investors, but the advent of the COVID-19 pandemic, which will drop 2020 GDP to an estimated -3.8%, will naturally reflect a corresponding reduction in Construction GDP share. The construction sector however, will highly recover once the outbreak is mitigated as the government has started to approve the resumption of the construction of major infrastructure projects to strengthen infrastructure competitiveness, tourism and attract more investments.

The completion of most of the supply of offices this year are expected to slide to 2021 or later due to the construction and mobility restrictions imposed by the government during the community quarantine. An upward demand for office space is projected by the end of the year until next year, provided that the COVID-19 outbreak will be contained by early 2H 2020.

Available office supply from the 1Q 2020 is at 556,686.86 SQM as compared to 378,152.24 SQM in the 2nd QTR 2020. Vacancy during the same period jumped from 4.6% to 5%. Average rent rose from 1,175 PHP/SQM to 1,195 PHP/SQM.

For the year on year comparison covering the 2Q of 2019 and 2020, total office supply went down from 1,004,956.51 SQM to 751,330.25 SQM while available supply declined from 525,959.48 SQM to 378,152.24 SQM. 47% were leased out in 2019 while 50% were leased out in 2020. Vacancy, meanwhile, improved from 7.31% to 5%. Average rent rose slightly from 1,110 PHP/SQM to 1,195 PHP/SQM.

Demand drivers for office spaces in Metro Manila

Data from the end of 2019 shows that the top drivers of demand for office spaces in Metro Manila are the Gaming Industry which occupies 36%, and the BPO Industry which occupies 30% of the total supply of Metro Manila office spaces. The remaining 34% of office spaces in Metro Manila are occupied by a variety of different enterprises.

Philippine Offshore Gaming Operators (POGO) occupied around 1.14M sqm. of total office space or approximately 10% of the total leasable office stock in the Philippines before the COVID-19 crisis began. As of June 2020, five (5) licensed POGOs and their local service providers have reportedly shut down their operations. These POGO operators are estimated to account for 11% of the total of 45 companies that are actively operating in the country. The travel restrictions imposed by both the Philippines and China will result in a slowdown of office take-ups from both POGOs and traditional occupiers.

As for the Business Process Outsourcing (BPO) companies, they continue to recognize the Philippines as one of their preferred office locations. According to the Information Technology and Business Process Association of the Philippines (ITBPAP), the Philippines ranked #1 in voice BPO and #2 in non-voice, in terms of complex services in the world. The Tholons Services Globalization Index 2019 ranks the Philippines top 5 in the top 50 Digital Nations, while in 100 Super Cities, Manila ranks at #2, Cebu City at #12, and Davao City at #95. The ITBPAP has also finalized the “Digital Cities 2025”. These cities will be developed into ICT hubs and will serve as business and innovation centers to sustain the rapid growth of the IT-BPM sector. The 25 new destinations are also expected to draw in investments that would create more jobs and other economic opportunities in areas outside Metro Manila.

The rising demand for flexible office space and townships

There is a growing demand for Flexible and Instant offices in the country from some 1.3 million freelancers, start-up companies, entrepreneurs, digital nomads and remote teams. These Flexible/Serviced offices are becoming popular due to several factors. They are often in prime locations in competitive areas, they are flexible in agreement periods, they offer a sense of community and crowd support services, they are aligned with the changing tech and business environment, and they provide access to pay-as-you-use facilities.

Townships have also become trendy locations for offices. Having residential, entertainment, civic, recreational, and office spaces located close to one another appeals to many companies looking for leasable office space and real estate developers have responded. There are currently 80 Township sites across the Philippines and 60% of them can be found outside Metro Manila, namely Baguio, Pampanga, Bulacan, Iloilo, Laguna, Cavite, Cebu, Davao, Dumaguete, Bacolod and Rizal.

Provincial office supply

Presently, Metro Manila, Metro Cebu, Metro Clark, Metro Bacolod, Davao City, and Iloilo City are the 6 cities considered as centers of excellence in the Philippines. But there are those identified as Next Wave Cities- or alternative investment hubs outside Metro Manila, namely: Baguio City, Cagayan De Oro City, Dagupan City, Dasmariñas City, Dumaguete City, Lipa City, Malolos City, Naga City, Sta. Rosa City, and Taytay, Rizal. These cities are expected to promote country-wide improvement, create job opportunities, and trigger economic advancement in their region.

LRG research shows that there is currently a 16% vacancy in the total sum of leasable office spaces across all provincial business districts in the Philippines. From the 2Q 2019 to 2Q 2020, total supply rose from 296,753.21 SQM to 307,557.99 SQM; Percentage of the space leased slowed down from 27% to 21%; while average rent rose from 551 PHP/SQM to 620 PHP/SQM.

The new normal for office leasing

Based on their research, LRG says the Office Leasing Market should be aware that POGOs are giving mixed signals and so much uncertainties. Demand for additional spaces are on hold and LRG does not expect any large space take up within the year. With regards to the BPO industry, LRG sees that location and expansion strategies of BPOs will most likely include multiple provincial sites to ensure continuity of business in cases of health issues such as a pandemic where prolonged lockdown can be implemented.

The Office Leasing Market should also recognize that townships will continue to be the preferred locations for offices by both employees who wish to live there and employers who want to keep their employees happy and in close proximity.

Although the COVID-19 pandemic has adversely affected the Office Leasing Market greatly, there is still hope for the near future. LRG expects the market to gradually recover in due time and anticipates that in the era of the New Normal, it will soon be business as usual.


Read more: https://manilastandard.net/spotlight/330451/the-state-of-philippines-office-leasing-during-covid-19.html