Metro Manila office market to grow and accommodate fast-rising BPO sector

Demand for office space in the Metro keeps vacancy rates low amid anticipated new office supply, and is putting pressure on rental performance

STRONG occupier demand from the offshoring and outsourcing market is expected to keep office space vacancy at reasonable rates in the following quarters; however, increasing supply pressure will keep rental rates tempered. According to global real estate services firm, KMC Savills, a record 263,400 sq.m. of new office space was completed in the second quarter of 2017, but vacancy rates were kept low at 4.2%. This exceeded KMC's initial estimates for 2017 as they saw strong leasing activity in the major submarkets covered.

Bonifacio Global City (BGC) accounted for more than half of the new supply with 140,800 sq.m., but held vacancy rate at 3.8% because of robust demand in the area. Single-digit vacancy rates were also retained in the Bay Area and Alabang submarket, which composed the rest of the new supply during the quarter.

In a number of submarkets, however, rental growth has declined, indicating significant supply pressure. Keeping rents affordable during this massive inflow of completions should sustain the take-up velocity in Metro Manila. “A critical factor on the first half’s impressive performance is due to landlords’ willingness to mitigate rents in order to stay competitive,” says Fredrick Rara, KMC Savills Research and Consultancy Manager. “With an anticipated completion of 892,100 sq.m. of office supply, sustained pressure on rentals in the next 12 months is expected.”

Rental performance in BGC has remained strong despite overwhelming supply, registering a YoY increase of 3.5%, as office supply remained relatively thin. While an estimated 186,500 sq.m. of new office stock is expected at the end of the year, single-vacancy rates remain a trend due to a forecasted consistent and strong net take-up of office space. Rental performance, however, may experience pressure in the coming months because of the new supply.

The Alabang submarket still registered a healthy yet slower rental growth at 2.6% YoY, as compared to 3.1% YoY recorded in Q1 2017. Rents in the area are still the lowest in the Metro, at Php 630.6 per sq.m. / month. Rental performance is expected to be modest in the latter half of 2017, but may be buoyed by limited available stock.

The Bay Area saw an increase of vacancies at 3.7%, with the completion of Double Dragon’s first building in the submarket. Occupier demand still remained strong despite the increase in vacancy. Deceleration of rental growth continued after posting 2.5% YoY growth, keeping average rents available at Php 712.8 per sq.m/ month. Rent is expected to normalize amid influx of supply expected in the next 12 months. Eventually, vacancies are expected to hit double-digits.

The country’s fast-rising BPO industry is anticipated to absorb these completions. With Manila still retaining its status as the 2nd best outsourcing destination (behind India’s Bangalore City, according to Tholons), the BPO industry shows no signs of slowing down. The remittances from Overseas Filipino Workers (OFW) comprised the majority of capital inflow from overseas in 2016 at US$ 26.9 billion, and BPO remittances trail behind at US$22.9 billion for 2016. The 10-year compound annual growth rate (CAGR) of the IT-BPO Industry Export Revenue registered at 13.5%, already overtaking OFW Cash Remittances Growth, at 7.7%. From 2016 to 2022, Philippine IT-BPO revenues are expected to grow at a CAGR of 9.2%, and estimated to hit US$ 38.9 billion by 2022.

“Despite a slowed GDP growth last quarter (6.4%), the Philippines remains to be a top location for foreign investments, which have rebounded since 2010 and have fueled growth in investments in 2016. The fast-growing BPO industry is expected to absorb new building completions, with tempered rental rates to facilitate the demand and keep vacancies at reasonable levels.” (PR)