The exit of POGOs (Philippine Offshore Gaming Operators) in the country and the shift to hybrid work arrangement are not likely to significantly raise vacancy rates in office spaces as more companies are returning to physical offices already but property developers are facing major economic headwinds and a slowdown in the domestic real estate sector, a leading property management consultancy firm said.
At the JLL Philippines Real Estate Market Overview, JLL Head of Research Janlo Delos Reyes said that office space occupiers have increased to 62 percent in third quarter from 51 percent in the previous quarter and companies across the board while companies with no office operations have gone down to one percent from five percent in the past quarter.
This is largely due to the fact that IT-BPO firms registered with the Philippine Economic Zone Authority were already required to operate 70 percent of their operations in physical offices from only 10 percent during the pandemic.
The demand for office space will be determined by new demands by occupiers. But he said that even with the exist of the POGO and the shift to hybrid work or work from home arrangement, these factors are not likely to raise vacancies significantly.
“So that tells you that there has to be occupiers who are returning to the office,” Delos Reyes said. Overall, Metro Manila vacancy was seen at 5.5 to 6 percent by year end.
In addition, rentals are levelling off and rates are expected to climb again by 2023-2024 yet.
In terms of retail, move outs in the retail market are at around 5,500 sqm while move ins are at 5,100 sqm because of lots of late openings by retailers as they prepare for the holiday season.
Delos Reyes said many of them have positioned their openings in the fourth quarter in time for the holiday season to capitalize on the traditional surge in holiday demand.
But on the developer’s side, Delos Reyes said property companies are facing macroeconomic headwinds. These are higher cost of investment, higher capital and operating expenses, and spending curb.
Delos Reyes noted that market cautiousness against headwinds and supply across all sectors are putting pressures on price performance as well as the peso devaluation and new policies that are seen to restructure the real estate market.
For real estate developers, he said, this means high cost of investments as interest rates increase. This would impact on slowing down in terms of construction across sectors.
“We're seeing borrowing costs increase in terms for developers who are planning to put up their projects. And what this means is that there might be slowdown in terms of launches, or development or new builds by developers across sectors. I think there is also this discernment between big developers and low-end developers,” he added.
Given weakened financial muscle due to the pandemic, he said, developers have to put up more money in the next couple of years.
The industry is also faced with higher capital and operating expense due to high cost of inputs and fuel cost. There will be constraints due to high cost of maintenance of building equipment.
As spending is expected to be curbed due to high inflation, this would result in slowdown particularly in expenses for household goods. This includes slowdown in expenses with regard to non-essential goods and services, affecting retail and hospitality sectors.
“But there are still pockets of opportunities for the market,” said Delos Reyes noting that demand from the IT-business process management sector will continue to drive office market and Philippine real estate.
The transfer of registration of IT-BPM registration from PEZA to the Board of Investments will also add up to the vacancies. Definitely, Delos Reyes said office space vacancies will remain elevated, but not significantly even if the POGO market will exit the local market
On the future of work, Delos Reyes said that hybrid work arrangement will continue but will be differentiated by industry by function.
In the near term, the trend is not necessarily an expansion in terms of space, but more of finding the right or imagining the office space that would attract more talent. Delos Reyes said this can trigger more collaboration between landlords and occupiers.
There are also environmental and social aspirations factors for locators given demands for meeting the
ESS (environmental and social standards), Sustainability goals, and preference for green spaces.
“So, these are some of the elements that will bring occupiers into the office space of the future,” he said.
In addition, he said, there has also be an investment in intelligent technology that would drive more partnerships between developers, occupiers and third-party providers in order to deliver the future of work.