Market Analysis

Diversified tenancy seen with BPO slowdown

Metro Manila office net take up reached 81,400 sq m (876,000 sq ft) GLA for the quarter, as vacancy remained low despite new completions. Pre-leasing is still strong with over 40% of buildings due in 2017 leased out.

A significant shift in tenant mix was seen with BPO share representing only 21% of total transactions, down from 60% in 2016. This decline in BPO share is attributed to geopolitical concerns forcing tenants to take a wait-and-see position on new expansions and the delay in PEZA proclamations.

The market was driven by traditional companies comprising 42% of transaction, offshore gambling at 30% and government agencies at 9%. Colliers believes that the BPO contribution may improve as foreign and local policies become clearer. Colliers suggests that developers build office spaces with sizeable floor plates to cater to BPOs, while allowing division of floors to meet the demand from other tenant types.

Forecast at a glance

Demand

Demand is shifting to a more diversified mix of BPOs, traditional companies, offshore gambling and government agencies. We expect demand to grow by 8% in the next 12 months.

Supply

Barring delays, supply is projected to reach 830,000 sq m (8.93 million sq ft) this year, up 54% from 2016.

Vacancy rate

Vacancy remained low despite new office completions. We still expect overall Metro Manila vacancy to hover between 4.5% and 5.5% in the next 12 months.

Rent

Rents in Manila Bay grew 5% QoQ, faster than other CBDs. We expect rents to grow between 4% and 11% across Metro Manila submarkets in the next 12 months.

More diversified demand profile sustains office market

Metro Manila office net take up totalled 81,400 sq m (876,000 sq ft) GLA for this quarter, 35% lower than 1Q 2016. A significant shift in volume mix was seen with BPO share representing only 21% of total transactions for the quarter from a high of 60% in FY 2016. The balance of 79% are divided across various sectors including traditional companies (40%), gambling (30%) and government agencies (9%).

Colliers International attributes the decline in BPO share to perceived geopolitical concerns and delays in PEZA proclamations. We note a longer due diligence process from BPO companies looking to enter the local market. Some tenants are taking a wait-and-see position, holding off expansions to new locations. PEZA-proclaimed buildings total only 13 out of 35 buildings due for completion in 2017; 15 more are under process, while the rest are non-PEZA. Since the Duterte administration took office, PEZA proclaimed buildings totalled 12, five of which are located outside Metro Manila.

A significant increase in demand from non-BPO companies was noted as they took-up spaces across the metro. Industries of these companies vary including IT companies, trading, construction, online shopping and energy, among others. We also note an increase in demand from government agencies, the biggest of which was PCSO in Export Bank Plaza taking up 9,000 sq m (97,000 sq ft). The increase in non-BPO share was due to (1) companies looking to move to better quality buildings from older ones, and (2) the expansion of new companies. Furthermore, not surprising was the sizeable share from offshore gambling companies totalling 54,000 sq m (581,000 sq ft) in volume.

We expected a surge in demand from offshore gambling companies as noted in our report last quarter (Offshore gambling redefines the office market). In 1Q 2017, offshore gambling accounted for 30% of total transactions.

Notable transactions include over 35,000 sq m (377,000 sq ft) closed in the Manila Bay Area, and 15,000 sq m (161,000 sq ft) in Alabang. There were also some transactions recorded in Fort Bonifacio, indicative of these tenants’ willingness to pay higher rents.

For the latter part of the year, Colliers expects the market to sustain this diversified portfolio with a potential rebound from BPOs as occupiers get a clearer view of government policies both locally and overseas.

Low vacancy noted despite six new completions

Despite the completion of six new buildings in Metro Manila, overall vacancy stood at a 3.6%, almost flat versus last quarter’s 3.4%. Total GLA of the buildings delivered in the quarter reached 100,000 sq m (1.08 million sq ft), are 66% of which were already leased out upon completion. This is reflective of the strong office demand from a more diversified portfolio of tenants.

We expect the strong pre-leasing in the market to be sustained throughout the year. Upcoming supply in Metro Manila is projected to reach over 830,000 sq m (8.93 million sq ft) in 2017, 42% of which are already pre-leased. Barring construction delays, this translates to at least 350,000 sq m (3.77 million sq ft) of potential office space demand by year end.

Tenants are constrained by the limited supply in the market, further exacerbated by the lack of available PEZA-proclaimed building options for BPOs looking to avail of ecozone incentives.

Rising rents accelerated by limited supply

The inverse relationship between demand and vacancies has pushed rents higher. Grade A rents across sub- locations grew by 1.9% QoQ. Grade B buildings saw a slightly slower rental growth of 0.9% QoQ.

We had earlier expected a continuous increase in rent especially given the low vacancy levels across submarkets, with a faster growth rate in alternative locations. For instance, emerging CBD Manila Bay Area rents average at PHP657 per month (USD13), up by 5% from last quarter. On the other hand, Makati CBD rents grew marginally to PHP1,016 (USD20), up by 1.6% in the same period while Fort Bonifacio rents averaged at PHP889 (USD18), up 3.3%.

Colliers expects the rise in rents to continue for the rest of the year. We foresee developers of PEZA-proclaimed buildings gradually increasing rents in a tight market for BPOs. Buildings due for completion within the year are only 40% PEZA-proclaimed, 40% under process and 20% are non-PEZA. The delays have limited supply for BPO-ready office spaces, thus putting additional pressure on rents.

In a recent forum organized by Colliers, entitled “Shifting Gears: Accelerating Economic Growth through Policies and Incentives", PEZA Director General Charito Plaza was guest speaker and the following are the key takeaways:

· There are about 40 PEZA applications pending with the Office of the President. DG Plaza personally to follows up on them to fast track the approval.

· The government is committed to keeping current policies and incentives for locators, but intends to encourage additional incentives through local

Supply of PEZA buildings

The 830,000 sq m (8.93 million sq ft) expected to come online within the year was 6% lower than yearend 2016 forecasts which stood at approximately 880,000 sq m (9.47 million sq ft). Among the buildings that adjusted timelines to 2018 are Aseana Three and Quantum.

Vacancy rates in major CBDs Makati and Ortigas were virtually unchanged QoQ at 1% as vacated spaces were easily leased out. The slight increase in vacancy of Fort Bonifacio is due to newly completed buildings Ore Central, Six and Eight West Campus. Emerging CBD Manila Bay Area vacancy remained at sub 1% even with the completion of Biopolis.

Colliers believes that the robust demand and the low vacancy levels highlight the need for more quality office

Shift in tenancy encourages flexibility

The Metro Manila market is characterized by high demand amid shifting tenancy profiles and increasing rents. Non-BPOs are emerging as a significant growth driver of a sector that has been BPO-reliant for years.

With the Philippine government showing continued support for BPOs, Colliers expects an even more diversified portfolio by the latter part of the year.

Consequently, the office market becomes more stable, being more insulated from the impact of abrupt changes in policies. In response, Colliers believes that both developers and occupiers employ new strategies to accommodate the shift in the market.

For developers, we suggest that they accommodate the different tenants in their buildings by designing office spaces to allow subdivision instead of limiting take-up to whole-floor takers; or allotting office spaces to flexible workspace operators to address the needs of smaller traditional companies.

On the other hand, different occupiers are encouraged to consider key market trends in leasing decisions. For BPOs, we suggest quickly closing deals in PEZA proclaimed buildings as the supply for these building types have become limited. Additionally, they may also start looking at provincial locations, particularly those more accessible to Metro Manila to ensure the availability of labor.

· PEZA intends to free PEZA-proclaimed buildings from illegitimate offshore gambling companies disguising themselves as BPOs and illegally availing of PEZA incentives.

Given these, we expect more PEZA proclaimed buildings in the second half of the year. Furthermore, developers and tenants are ensured of favorable incentives; and they may allay fears of potential raids in buildings due to the crackdown of illegitimate gambling companies.

PEZA-Proclaimed Buildings, June 2016-May 2017

Metro Manila
Ben-Lor IT Center
Capella IT Center
Cyber Sigma
Cyberscape Gamma Kayumanggi Center
Rack IT Data Center
UP Town Corporate Center

Source: Colliers Report