Manila’s office vacancy rate reaches record highs since 2005

It surged 726bps to 12% in Q2 2021.

Completions of office spaces in Manila for the last quarter of 2021 and the first quarter of 2022 remained on schedule, according to JLL. The market will see over 136,000 sqm of new office space from One Ayala (Tower 1) and 1 Proscenium in Makati City and Worldwide Plaza and Manta Corporate Plaza in Taguig City.

“Vacancy accelerated 137 bps q-o-q and 726 bps y-o-y to 12.0%, the highest since 2Q05, accounting to extensive move outs and pre-terminations recorded,” the analyst added.

Here’s more from JLL:

Rampant move outs results in back-to-back negative net absorption

Net absorption in 2Q21 eased to -58,400 sqm from -113,800 sqm in 1Q21 due to slower velocity in move outs. Still, the majority of exits consisted of POGOs and O&Os. There were also some move outs from flexible space operators and traditional firms. Significant movements were the pre-termination of Common Ground in BGC (2,100 sqm) and transfer of Grab in Makati to Ortigas CBD (3,300 sqm).

Leasing activity in 2Q21 was muted compared to previous quarters. Take-up in 2Q21 came from traditional firms (1,000 sqm to 2,000 sqm of space). Despite weak demand, enquiries grew and were observed from O&O firms. They are currently canvassing for possible spaces but are holding off finalising deals because of the current WFH set-up. They are expecting to restart expansion plans by 2022.

Rents decline while capital values flatten due to sluggish demand

Rents in 2Q21 dropped by 0.3% q-o-q and 1.1% y-o-y to PHP 1,121 per sqm per month, on the back of some landlords clipping rates to remedy inflating vacancy levels. However, most landlords kept rents as is but continued to have more flexible terms such as allowing short-term leases.

Average capital value stayed at PHP 171,417 per sqm in 2Q21 due to slow sale activity alongside listings retaining prices from previous quarters.

Outlook: Slow rebound in demand to stifle rent improvements

Expected positive absorption from upcoming completions may ease vacancy but may likely remain above 10%. The slow recoil in demand may continue to dampen rental growth.

Last June 2021, the implementing rules and regulations (IRR) of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) act was finalised and signed. In the final IRR of CREATE, corporate income tax was lowered from 30% to 25% which raises Philippine competitiveness. This may help to funnel office investments and support new corporate expansion in the country.

Note: Manila Office refers to the Makati City and Taguig City Grade A office market.