Manila's office net absorption plummets 80% in 2020

Take-up in 4Q20 reached 85,800 sqm, enough to lift total net absorption to 68,700 sqm for 2020.

The positive net absorption during the quarter was mainly due to the relatively solid occupancy in newly completed developments.

According to JLL, the majority of the transactions were still from lease renewals from the offshoring & outsourcing (O&O) sector. On a y-o-y basis, aggregate net absorption in 2020 was 80% lower compared to the net absorption recorded in 2019.

Vacancy breaches above the 7% mark at end-4Q20

The vacancy rate hit 7.1% at the end of 2020, up by 186 bps q-o-q. Vacancy rates in Metro Manila remained elevated as move outs were recorded, coming from both traditional office tenants and Philippine Offshore Gaming Operators (POGOs).

New supply additions came in at 174,400 sqm in 4Q20, ending the year with total existing office supply of 4.3 million sqm. New office supply came from the completions of Ayala Triangle Tower 2, Factset Tower, Century Spire, Blakes Tower, and GSC Corporate Center.

Rents and capital values remain under pressure

Downward pressure in rents persists in 4Q20, with average rent falling by 0.6% q-o-q to PHP 1,126 per sqm per month. Although most asking rents were kept unchanged, landlords remained flexible in terms of contract duration as well as closing rents. Landlords remained open to short-term lease contracts and discounts.

Capital values marginally declined by 0.1% q-o-q to PHP 170,221 per sqm as some buildings lowered selling prices amid thinning investor demand at the end of the year. Despite the decline, most enquiries came from local developers searching for income-generating assets and to take advantage of the cheap borrowing costs. This supported the market and kept capital values from a significant downturn.

Outlook: Vacancy to remain elevated

We expect demand to gradually recover in 2021 as investors may resume expansion/investment plans amid improved market sentiment. Diversification outside traditional CBDs will be a key theme this year and we may see interests in small office spaces as companies continue to adapt a WFH setup.

We are likely to see rents pick up in 2021, albeit at a slow pace. Vacancy may remain above the historical average as most offices are likely to keep flexible work arrangements, as well as some offices being vacated by POGOs. The prolonged above-average vacancy rates may keep rents from growing significantly in 2021.

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