Office space vacancy rate to double to 10%

Published April 7, 2020, 12:00 AM

by manilabulletin_admin

By Bernie Cahiles-Magkilat

Vacancy rate in office space this year is expected to jump to 10 percent, double the 5 percent rate in 2019, creating shifts to tenants and buyers’ market away from the grasp long held by landlords and sellers, according to a property management and consultancy firm.

In a quarterly briefing conducted by Santos Knight Frank to assess the impact of the COVID-19 pandemic on the country’s real estate market, company Chairman and CEO Rick Santos said, “We expect office space vacancy this year to reach 10 percent from 5 percent in 2019 in Metro Manila as tenants reassess their expansion plans.”

The high vacancy rate in office space this year is expected following the slowdown in the domestic economy as a result of the coronavirus pandemic causing deep downturns in all property segments from hospitality, office, residential, industrial and retail. Already, the domestic GDP is expected to dramatically slowdown to 0.6 percent to 4.3 percent from 6.2 percent in 2019.

Santos said the high vacancy rate is caused by downward pressures on rents and capital values due to high supply on low demand. SKF data showed that office lease rates had been steadily rising in the past 5 years. In 2018, rental rate for office space grew by a high of 8.83 percent (₱1,033 per square meter in Metro Manila) before slowing down to 6.87 percent (₱1,104 per sqm) in 2019.

SKF has no estimates as to the decreases in rents but expects a freezing of rental rates in the second quarter this year and thereafter with potential contraction at some point as there will be drops in real estate activities and other economic transactions for the first half of 2020.

SKF senior director for occupier services Morgan Mcgilvray also explained that even before the COVID-19 crisis there were already two real causes for the dampened office space demand this year.

First cause, he said, was that demand in 2020 is no longer as robust as 2019 because there are fewer POGOs taking up office spaces after a strong take up last year. Second, he said, there are a series of new buildings that are going to be finished this year.

“So, taken this into account, the stock of office spaces continues to fuel increase in vacancy,” he said. “The POGOs, which largely ramp up office space demand in 2019, suddenly plunged into uncertainty with continuing travel bans.”

In addition, the residential property market, which had an estimated 263,278 total units supply as of the last quarter of 2019, is expected to reduce its selling prices from the average selling price of ₱203,922 per sqm last year.

“This price will go down so more pressure on rents and capital values as the residential market would have so download pressure for more vacancies. Clearly, there is the best sellers’ market move into a buyers’ market so developers are expected to offer more incentives. Actually, developers look for sales. This is good opportunity for buyers in the residential sectors,” said Santos.

Santos, however, said this crisis ushers in market shifts from landlords to tenants and from sellers to buyers, a scenario that encourages both to grab opportunities because all is not lost during a crisis period.

As tenants experience value shocks, Santos said, market rates would be established to create a win-win scenario between landlords and tenants. Landlords, he said, should look at to “repurpose” their buildings to suit to other needs such as “quarantine” quarters or housing for corporate employees for vacant buildings.

Santos added that hospitality, office, residential and retail are taking a hit, but there are opportunities for flexibilities.

For one, Santos said, the crisis would give the slowing down business process management industry a much-needed boost in the arm as more global companies would be forced to outsource their work functions as a way to cut down costs. “This will spur demand for the BPO industry in the Philippines which continues to be attractive because of the country’s competitive cost and young talent,” he said.

The industrial and logistics property markets will remain to be bright spots with more consumers turning to e-commerce as an alternative method purchasing. The slowdown in the production of non-essential goods caused by the supply trade disruptions would mean a boom in warehouse take-up.

As liquidity and flexibility will be important for business to stay afloat, Santos said, landlords can also capitalize on demand in healthcare, food, and logistics to convert their facilities into pop-up healthcare centers, employee housing, offices, warehouses for last-mile logistics, and grocery stores.

The crisis has also changed the preference of tenants that landlords and developers must take cue from. Santos said that the COVID-19 pandemic will force landlords and developers to implement sustainable and wellness-oriented developments and international best practices.

“Tenants become more conscious of the impact of real estate on the health of their employees,” he said.