Hot pandesal

The condo glut reminds me of hot pandesal.

To those who are too young to have heard of it, the hot pandesal craze is a classic example of economic herd mentality in business. Except that it involved neighborhood entrepreneurs, not sophisticated business conglomerates.

Some decades ago, a new, compact and affordable oven made it easy for anyone to bake bread without a massive traditional brick oven. The first few people who set up hot pandesal stalls made good business.

Seeing the early success, people reacted in Pinoy-type gaya gaya. If a neighbor saw a pandesal stall booming, they bought an oven and opened one right across the street.

Eventually, there were more pandesal stalls than there were people ready to buy the bread. The market saturated, demand collapsed and within months, most of those stalls quietly shut down, leaving owners with idle ovens.

In the condo boom, developers provided the equivalent of the pandesal oven. They made it easy to buy condo units through “No down payment” and P10,000-a-month pre-selling schemes. The developers also targeted early BPO expats and POGOs and that produced amazingly huge instant cash flows.

So, more developers joined the fray and all of them seem to have the illusion that there is infinite demand. I often wondered if they did serious market study before throwing billions of pesos building those condo projects.

But these are blue-chip real estate developers the likes of Ayala, SMDC, Megaworld, Filinvest and DMCI. They must have conducted market studies. But they also fell into a classic case of collective irrational exuberance.

When they saw their rivals reporting “100 percent sold-out pre-sales” on a project, their boards rapidly approved three more towers right next door.

So, they built aggressively because the data was wildly positive — unprecedentedly so.

POGOs were expanding exponentially, renting entire office buildings and paying 12 to 24 months of rent upfront in cash. They treated POGO demand like there was no tomorrow. It turned out to be a volatile, politically sensitive anomaly.

Maybe their market studies also focused on “take-up rates” (how fast units are sold). For years, mid-income condos were selling out within weeks of launching. But who was buying?

As it turned out, units were not being bought by end-users (local BPO workers or families). They were being scooped up by speculative investors taking advantage of “No down payment” or P10,000-a-month pre-selling promos.

When the market cooled, thousands of speculators realized there were no actual renters or secondary buyers available, triggering the wave of defaults and cancellations.

The other thing that drove the excitement of developers is the BPO growth wave for over two decades. This caused developers to assume a linear equation: More BPO revenue = more headcount = more office space and condo demand.

Then came the black swans. Two massive disruptions happened: the permanent shift to hybrid/remote work post-pandemic, and the rapid decoupling of revenue from headcount caused by AI automation. Developers were looking backward at 20 years of historical data, completely missing the technological inflection point.

In short, exuberance caused them to over-extrapolate the good times, ignoring the fragile regulatory and macroeconomic foundations that held the boom together.

The luxury sector was not as badly hit but demand also cooled. According to property analysis firms like KMC Savills and Colliers Philippines, the heightened scrutiny and sweeping asset investigations also cooled the higher end of the real estate market.

Politically exposed persons and wealthy public works contractors — who traditionally used high-end real estate and luxury condos in Makati and Bonifacio Global City to park illicit capital — instantly pulled back.

The fear of wealth tracing and asset seizures effectively froze the luxury and upper-middle segments, cutting off a reliable liquidity pipeline that developers use to cross-subsidize their struggling middle-income inventories.

Ultimately, increasingly tough times made families defer major real estate purchases and left developers trapped under a heavy macroeconomic slowdown.

The tragedy from all these is what economists call the misallocation of capital. By channeling hundreds of billions — and collectively, trillions — of pesos into speculative real estate, the Philippines effectively starved its most critical productive sectors of funding, while simultaneously causing inadequate infrastructure to choke Metro Manila.

When a nation’s banking system and wealthiest conglomerates pour their liquidity into building vertical concrete boxes, that capital is diverted away from sectors that build long-term, self-sustaining economic wealth.

While developers bought up vast tracts of land on the urban fringes of Metro Manila, Cavite and Laguna to convert them into subdivisions and condo footprints, the agricultural sector suffered from a chronic lack of cold-storage facilities, modern machinery and supply-chain logistics. This has left the country highly vulnerable to food inflation.

Unlike Vietnam or Thailand which directed capital into factories and high-tech assembly plants, the Philippine private sector heavily favored real estate because it offered rapid, tax-incentivized and highly visible returns during the good times. As a result, the country missed critical windows to build a robust domestic manufacturing base.

In a healthy economy, real estate may help the rising middle class feel economically secure. However, when 80,000+ units sit empty as “ghost condos” or face heavy cancellations, they become dead capital.

Money locked in concrete that generates no rental yield, creates no new jobs after construction concludes and produces zero export value.

Ultimately, the exuberance created a paradox: the very industry that produced postcard pretty pictures supposedly showing robust Philippine economic growth ended up building a National Capital Region that is increasingly too congested and expensive for its actual workforce to comfortably live in.

So, if our economy eventually goes belly up at the rate we are going, our private sector economic elite is responsible for a big part of the blame. Their greed, lack of imagination and sense of national purpose as well as the ineptness of our government leaders caused our current bad times.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco