Office vacancy expected to remain high

Office vacancy rates are expected to remain high due to the total ban on Philippine Offshore Gaming Operators (POGOs) and the implementation of the CREATE MORE Bill, which supports flexible work arrangements and will likely result in more vacant spaces, according to the third-quarter MarketBeat report by Cushman & Wakefield Research.

Cushman & Wakefield (CWK), a leading global commercial real estate services firm, reported that at the end of the third quarter this year, overall vacancy rates for prime and grade ‘A’ office developments in Metro Manila rose by 280 basis points (bps) quarter-on-quarter (q-o-q) and by 136 bps compared to the previous year. The average vacancy rate reached 18.2 percent, the highest level recorded by CWK Research since the second quarter of 2004, marking an increase of over 1,380 bps since the second quarter of 2020.

In the third quarter, an additional 114,000 square meters of office space was added to the market. This, along with the significant volume of returned office spaces due to major corporate occupiers rationalizing their office needs, has increased the volume of vacant spaces. Thus, in the medium term, vacancy rates are expected to remain high due to the total ban on POGOs and the implementation of the CREATE MORE Bill.

Average asking rents for prime and grade A office spaces, CWK Research said, experienced a slight decrease in the third quarter, marking the fourth consecutive quarter of decline. The average headline rent for prime and Grade ‘A’ developments in Metro Manila closed at P1,003/sqm/month, a 67-bps decrease from the reported average of P1,010/sqm/month in the previous quarter and a 363-bps decrease from the average of P1,041/sqm/month in the same quarter the previous year.

According to Tetet Castro, director and head of the tenant advisory group at CWK, “The Metro Manila office market is exhibiting a slower-than-expected recovery in the third quarter. Overall vacancy rates have steadily increased, and average headline rents have marginally declined again this quarter, making the market more favorable for tenants.”

“The initial effects of the total POGO ban and amendments to the CREATE Bill are already being felt in the third quarter. Several returns of office space have been observed, and this, coupled with the completion of new developments, has resulted in increased vacancies. In the medium term, elevated vacancy rates and lower headline rents in the Metro Manila office market are expected.”

Claro Cordero, director and head of research, consulting, and advisory services at CWK, pointed out that “In the third quarter, the most significant increases in vacancy rates were seen in mature markets. The Pasay City corridor experienced a rise of over 690 bps q-o-q, followed by the Taguig City corridor with a 590 bps q-o-q increase, and the Makati City corridor with a 180 bps q-o-q increase. The high concentration of POGO companies in Pasay City and new completions with low pre-commitment levels in Taguig City and Makati City have contributed to these elevated vacancy rates. In contrast, vacancy rates in office developments near the borders of Metro Manila, such as Muntinlupa City, Parañaque City, and Quezon City, remained relatively stable, with changes below 50 bps q-o-q.”

According to Mr. Cordero, “The US presidential election introduces another challenge for the outsourcing industry due to the short-term uncertainty surrounding key policies affecting US firms’ outsourcing activities. This is compounded by the slowdown in creating regional hubs as the global economic growth outlook remains subdued.”

AI use affects vacancy as well

He added, “The increasing use of artificial intelligence (AI) advancements, especially in the IT-BPM industry, could potentially limit demand growth for office spaces in key markets if stakeholders do not fully adapt to these changes. AI-driven technologies like virtual assistants, chatbots, and automated customer service interfaces have replaced human roles due to their improved efficiency, service quality, and cost-effectiveness. However, AI still requires human intervention for data analytics and managing more complex customer service issues. Therefore, it is crucial for industry stakeholders to develop policies and programs that equip and upskill workers in the IT-BPM sector with the necessary technical skills. This will help them navigate the evolving demands and seize new opportunities, ensuring steady industry growth and continued demand for office spaces in the long term.”

CWK’s research director continued that “With near-historic high market vacancy rates, the closure of POGO operations, and the ongoing trend of flexible work schemes, office market vacancy rates are expected to rise further. In the residential segment, the recent monetary policy easing may not immediately translate to stronger demand for residential developments in the near term. However, it is expected to stabilize housing demand for mid-priced units in the long term. Further, while local consumer purchasing power is anticipated to moderately recover in the near term due to expected further policy rate cuts by the Bangko Sentral ng Pilipinas (BSP) and a slowdown in inflation to 1.9 percent by the end of September, the weak recovery of major developed economies could hinder rapid trade growth and moderate the growth of inflow of remittances from overseas Filipino workers. The seasonal surge in spending is anticipated to enhance retail sales and increase customer visits, but the medium-term growth prospects for the retail shopping sector remain moderate as consumers adjust their spending habits in response to the gradual reduction in living costs. In this context, retail spaces vacated by restaurants, services, and specialty shops catering to POGO employees, as well as those in mall developments that have yet to adapt to new shopper preferences, will add to the available stock in the market.”