Delayed recovery

As our country was already experiencing some gains toward business recovery, Metro Manila and nearby areas were once again placed under stricter quarantine.

This is the second time that the country observed Labor Day under a thick and dark cloud of uncertainty.

Many of our fellow Filipinos continue to be out of work or continue to suffer from reduced income. Unless business activities normalize, this situation unfortunately will remain. Reduced consumer spending means less demand for goods and services, more businesses either closing shop or decreasing operational hours, and consequently, less work opportunities for our workers.

While our country has started vaccinating, it has hardly made a dent on improving business confidence. Hopefully, as the vaccines from the private sector start arriving in the next few months, more Filipinos will have access to COVID-19 vaccines, enabling the people to go back to work and our economy can get back on the path to recovery.

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The property sector, on which many other business activities depend on, continues to suffer from the effects of the pandemic.

In its latest report, Colliers Philippines noted that while it already saw the highest transaction level in the first quarter since the lockdown began last year, the surge in COVID cases early this year halted the gains.

During the first quarter, about 199,900 square meters of new office space were completed, with the Makati central business district and the Bay Area covering 75 percent of new supply during the period.

While Colliers expects new supply to reach 878,200 sqm this year, it said that buildings with low pre-commitment levels and those in the early stages of construction are likely to compel landlords to defer completion timelines until market conditions improve.

From 2021 to 2025, it sees the delivery of 641,200 sqm of new office space per annum, down three percent from its previous forecast, with the Bay Area, Fort Bonifacio, and Quezon City likely accounting for close to half of the new supply during the period.

Colliers reported that in the first quarter, lease transactions in Metro Manila reached the highest mark during the pandemic, but net take-up remained negative for the fourth consecutive quarter due to higher lease cancellations, non-renewals, and pre-terminations.

In the first quarter, net take-up reached negative 52,800 sqm as traditional, outsourcing firms and POGOs continue to vacate office spaces. This figure is also lower than the 125,200 sqm of net take-up recorded in the same period last year.

Colliers observed that e-commerce, outsourcing, and data centers absorbed spaces in the first quarter of 2021, adding that it expects firms from essential segments to lead office take up in the next 12 months. E-commerce firms such as Shopee and Amazon led office space take-up from January to March, while substantial space take-up was observed from traditional occupiers, data centers and even POGOs. Most of these firms occupied spaces in Ortigas CBD, Fort Bonifacio and Quezon City. Traditional firms covered about 44 percent of total office deal transactions during the period.

The report noted that data centers are also likely to drive office space demand moving forward as they expand in developing countries such as the Philippines to cater to the growing demand.

Unfortunately, it said that while some outsourcing firms continued expanding, some of them also continue to rationalize office spaces as they carry out work-from-home strategies and comply with government-mandated health protocols. Outsourcing firms, the report said, are likely to continue these measures until all employees have been vaccinated against COVID.

There has also been a notable move away from traditional business centers. Colliers disclosed that outsourcing firms have been occupying office spaces outside Metro Manila due to less disruption in business operations caused by the rising COVID cases compared to Metro Manila. Among the firms that took up office space are Legato and Teledirect in Iloilo, 24/7 InTouch in Cebu, Sitel Philippines in Tarlac and TaskUs in Batangas.

Meanwhile, the report also stated that the increasing number of pre-terminations and the substantial new office supply that came online across Metro Manila totaling 199,900 sqm has resulted in a vacancy of 11 percent in the first quarter of 2021 from only 9.1 percent in the fourth quarter of 2020.

Colliers expects office vacancy to increase to 12.5 percent at the end of 2021 due to the projected new supply of 878,200 sqm and the estimated net take-up of about 351,300 sqm, with the Bay Area and Ortigas CBD likely recording higher vacancies due to the significant new supply over the next 12 months.

The report also disclosed that office rents on the average have declined by 3.7 percent quarter on quarter, with a further correction in lease rates expected especially in submarkets with high vacancies due to lease cancellations like in Quezon City, Fort Bonifacio and Makati fringe, and significant amount of upcoming supply in the Bay Area and Ortigas CBD).

For 2021, it sees office rents dropping by 15 percent before a slow recovery in 2022. Colliers noted that office leasing recovery beyond 2021 will likely hinge on the pace of the COVID inoculation, especially the inclusion of BPO employees in the vaccination priority list and developments in the recently enacted CREATE law.

To cope with the declining demand, Colliers observed that some landlords have been offering more favorable commercial structures to tenants such as lower base rents, delayed escalation, longer fit-out and rent-free periods, fit-out financing, and other customized incentives just to attract more tenants.

In its report, Colliers recommended that tenants take this opportunity to use a blend and extend strategy, such as negotiating for lower rents in exchange for longer-term commitments.

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