The Philippine GDP contracted by 11.5%, which is lower than expectations continues to be a significant indicator of the economic slowdown brought by the COVID-19 pandemic. Amid the multi-sectoral impact on the Philippine real estate industry, the 3Q/2020 Metro Manila office market performance still offers no relief to landlords as the situation worsens for most submarkets.
In KMC Savills latest office briefing, one of the biggest factors that contributed to the unexpected market shift is the POGO exodus and how its subsequent effects impacted both the office and residential sectors.
Massive losses were recorded particularly at the C5 Corridor-Eastwood district after a total of
40,200 sq m of office space was vacated by online casinos and gaming operators. Executive Director for Tenant Representation John Corpus said that more damage is expected as companies are finalizing termination of their current leases specifically in the Bay Area.
The POGO exodus has also markedly impacted the residential real estate sector as the country’s US$8–billion online gaming industry employs mostly Chinese nationals for customer support and marketing jobs. “From what we are seeing, this is a paradigm shift for the real estate market,” Corpus stated. “We are now experiencing a market more friendly to tenants as the supply increases and seeing how pricing will be more flexible while concessions such as free rent soar.”
The leading consultancy and brokerage firm also tackled its far-reaching drawbacks in the residential sector as entire residential towers are vacated. Corpus emphasized, “While vacancies from online casinos are so far just a “rounding error” in a multimillion square meter home market, we’ll continue to see a lot more of that continuing to compound in the next six months.”
Weak office demand
The government-imposed lockdowns also manifested its effects on the office market as vacancy rates in Metro Manila climbed to 7.3%, nearly a 2% increase from 4Q/2019. Makati also breached the 3% mark in vacancy for the first time in three years, finishing 3.3% this quarter.
“All major submarkets have registered a 0.2% QoQ decline in rents, possibly hinting at annual contractions in overall rent levels in the coming periods,” Corpus added. This helps create a better concession environment for tenants to further drive occupancy.
Ortigas Center has registered the highest vacancy rates among the major submarkets in the country’s capital in 3Q/2020 with 17.6%. With more office stock forecasted to be completed throughout 2021, overall vacancies may continue to worsen to almost 25%.
Rise of Hub and Spoke
Corpus stated that the Alabang submarket is forecasted to benefit from the rise of the hub and spoke office models in the Philippines as more companies consider decentralizing their office operations. A wave of occupiers is considering moving farther from the dense Makati CBD and BGC submarkets and enjoy lower rental rates as PHP 694 per sq m / month as of 3Q/2020.
“Quezon City is also being considered as a more viable office address given the submarket’s flexibility in location,” he added. KMC analysis concluded that its multi-location setup appeals more to companies looking to relocate their workforce post-lockdown.
Corpus concluded that the current business environment in Metro Manila has struggled with very little room for recovery or growth. However, as the Philippine economy slowly reopens and companies begin their business re-entry plans, developers are more likely to work closely with tenants to overcome the pandemic slump by offering creative concessions in an attempt to save or maintain their lease rates.