KMC Savills, the country’s leading real estate solutions provider, expects continued growth in regional cities’ office market with the expansion of the information technology and business process management (IT-BPM) sector.

During the launch of the KMC Savills’  Regional Office Briefing, Executive Director John Corpus said Thursday, Oct. 19, that business process outsourcing (BPO) offshore companies are growing, primarily driven by third-party BPOs, as seen in past trends.

“During the pickup of the office market, it’s always been the third party who’s starting it, especially when there’s a crisis. And then, as soon as the market is more predictable, then a lot of multinational companies are doing it themselves,” Corpus said during the online briefing.

KMC Savills reported that the IT-BPM companies such as Concentrix, Teleperformance, ubiquity, Transcom, Alorica, Accenture, and Telus, among others have expanded their offices in the cities of Cebu, Clark, Davao, Iloilo, and Bacolod.

Corpus said that there are 30 office agents going around the Philippines to show sites to their clients and monitor which companies are taking up spaces.

Chief Operating Officer Cha Carbonell added that other industries are expanding office-wise in their regional cities, knowing the given demand for them to expand there, such as the e-commerce and logistics industry – which need satellite offices.

“[But] the demand of office space predominantly… would still come from the BPO sector but there are other types of industries [which] will help the absorption of office spaces in our regional cities as well,” he said.

Meanwhile, KMC Savills Managing Director Michael McCullough noted that the provincial areas have performed better than Metro Manila for the first time in a long time, driven by the desire of companies to relocate their top employees to the provinces during the pandemic.

“Companies want to go where the best employees are, so a lot of people during the pandemic went and returned to the provinces and so that’s where the companies wanted to move back to,” he said, adding that this has resulted in lower rates and better office locations, indicating continued success in the regional cities.

McCullough also said that generative AI will affect the IT-BPM industry but would create job opportunities with higher quality and higher pay.

“There’s an opportunity there but there’ll definitely be a disruption,” McCullough added.

Market outlook in the regional cities

KMC Savills’ report revealed that the total office stock in Iloilo, Bacolod, and Davao are not as sizeable as Metro Cebu or Metro Clark, however, the increased demand for these markets should trigger developers to construct new Grade A office buildings or introduce new business districts.

Based on the comprehensive report, Cebu’s vacancy rate is forecasted to return to pre-pandemic levels by 2025 due to the recovery in demand, with Cebu Business Park (CBD) and Cebu IT Park (CITP) leading the rebound.

The Cebu Fringe will likely delay this as the lack of leasing activity persists. However, KMC Savills does not discount the possibility that a brisk upswing may happen if inventory in CBD and CITP declines rapidly.

In Metro Clark, the market continues to struggle with its vacancy rate rising to 33.6 percent in the first half of 2023 as one of the few remaining vestiges of the POGO sector leaves.

Office buildings outside of Clark Freeport Zone (CFZ) have performed better with their vacancy rate averaging 25.3 percent in the same period.

Although the overall vacancy rate is higher than in some submarkets in Metro Manila, leasing activity in Metro Clark has been healthier in the capital – albeit at specific locations only.

Meanwhile, Davao’s overall vacancy rate dropped to 6.4 percent in the first half of this year from 12.1 percent at the end of 2022. The market has continuously outperformed expectations after the vacancy rate peaked at 21.9 percent in the third quarter of 2021.

Amidst the influx of demand from outsourcing firms, Davao remains one of the most affordable markets in the country. Unlike the other office markets in VisMin, Davao still lacks a sizable cluster of townships that can command above-average rates.

However, KMC Savills forecasts that the current demand trend may be an opportunity for developers to rethink their strategy in the region.

In Iloilo, the overall vacancy rate rose to 8.1 percent after the completion of Cybergate Iloilo Tower 2 in Pavia. Grade B stock saw a massive drop in its vacancy rate to 13.1 percent from 22.7 percent at the end of 2022.

With the report, KMC Savills is optimistic that vacancy rates should remain in single digits despite another 22,500 square meters of new office space in the second half of 2023.

Lastly, Bacolod’s market occupancy remained low with a vacancy rate of 13.5 percent as demand continued to struggle. Leasing activity may improve in the coming quarters as demand is expected to spill over from its neighbor Iloilo.

Conditions are expected to be static in the next term, but leasing activity has picked up in recent months.

The report showed that the demand can accelerate in 2024 due to the tight conditions in Iloilo. Given how quickly demand poured into its neighboring city, similar action by the market is expected in Bacolod.