Office leasing challenged by pandemic

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    Consultancy firm Lobien Realty Group (LRG) said the office leasing market has been adversely affected by the new coronavirus disease pandemic but expects it to gradually recover in due time.

    Based on LRG’s research, available office supply in the Philippines dropped to 378,152.24  square meters (sq.m.) in the second quarter from  556,686.86 sq.m. in the previous quarter.

    The vacancy rate quarter-on-quarter inched up from 4.6 percent to 5 percent while average monthly rent rose from P1,175 per sq.m. to P 1,195 per sq.m., indicative of slower takeup due to the lockdown.

    Year-on-year, vacancy improved from 7.31 percent to 5 percent due to fewer supplies that came online for the period caused by delays in construction.

    LRG said average rent rose slightly from P1,110 per sq.m. to P1,195 per sq.m.

    As of the second quarter, total office supply stood at 751,330.25 sq.m.,  down from 1 million sq.m. in the second quarter of 2019.

    Of the total available supply in the second quarter,  47 percent were leased out in 2019 while 50 percent were leased out in 2020.

    LRG remains hopeful of the office market prospects for the future.

    While it sees office rental rates declining, LRG said these will gradually recover.

    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.

    LRG is also optimistic about the recovery of the construction sector as the government has approved the resumption of the construction of major infrastructure projects to strengthen infrastructure competitiveness, tourism, and attract more investments.

    Growth drivers

    Citing data as of the end of 2019, LRG identified gaming and business process outsourcing (BPO) as the  top drivers of demand for office spaces in Metro Manila.

    Gaming occupied 36 percent and the BPO industry took up 30 percent of the total supply of Metro Manila office spaces. The remaining 34 percent of office spaces in Metro Manila were occupied by a variety of different enterprises.

    Prior to the pandemic, LRG said Philippine offshore gaming operators (POGO) occupied around 1.14 million sq.m. of total office space or approximately 10 percent of the total leasable office stock in the Philippines.

    But as of June 2020, LRG said five licensed POGOs and their local service providers have reportedly shut down their operations. These POGO operators are estimated to account for 11  percent of the total of 45 companies that are actively operating in the country. LRG said 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.

    Mixed signals

    Based on their research, LRG said POGOs are giving mixed signals and so many uncertainties.

    Demand for additional spaces is on hold and LRG does not expect any large space take-up within the year.

    In contrast, LRG said BPO companies continue to recognize the Philippines as one of their preferred office locations.

    LRG sees 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.

    It cited a report of the  Information Technology and Business Process Association of the Philippines  (IBPAP) which said the country ranks first in voice and second 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 second, Cebu City at 12th, and Davao City, 95th.

    The IBPAP has also finalized the Digital Cities 2025 which will be developed into ICT hubs and will serve as business and innovation centers to sustain the rapid growth of the IBPO sector.

    Flexible offices, townships

    LRG also notes 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 because often, these are in prime locations in competitive areas, offering flexible agreement periods, give a sense of community and crowd support services, are aligned with the changing tech and business environment, and provide access to pay-as-you-use facilities.

    LRG said 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.

    According to LRG, 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  80 townships across the country of which  60 percent are outside Metro Manila, namely Baguio, Pampanga, Bulacan, Iloilo, Laguna, Cavite, Cebu, Davao, Dumaguete, Bacolod, and Rizal.

    In the provinces

    LRG research shows 16 percent vacancy in the total sum of leasable office spaces across all provincial business districts in the Philippines.

    From the second quarter of 2019 to the second quarter of 2020, total supply rose from 296,753.21 sq.m. to 307,557.99 sq.m.

    The percentage of the space leased slowed down from 27 percent to 21 percent; while average rent rose from P551 per sq.m. to P620  per sq.m.

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