Office vacancy rate seen breaching 20% by yearend

As POGO tenants pack up 

MANILA, Philippines — Real estate owners should make strategic adjustments to spaces previously tenanted by Philippine offshore gaming operators to mitigate the impact of the POGOs’ exit from Metro Manila’s office market, according to global investment management company Colliers.

In a report, Colliers said the recent government decision to ban POGOs is expected to affect Metro Manila’s office market, with vacancy rate seen breaching 20 percent by yearend.

“By end-2024, we expect vacancy to reach 22 percent from 19.3 percent in 2023 due to the POGO ban. The projected increase in space surrenders (pre-pandemic leases) for the remainder of the year is also likely to contribute to the increase in vacancy,” Colliers said.

According to the report, POGOs occupied about 489,000 square meters of office space in Metro Manila as of end-June, or about 3.5 percent of the total office stock.

To make their properties appealing to prospective clients and mitigate losses once POGOs exit the market, Colliers said landlords, particularly those with high exposure to POGO tenants, should consider implementing various strategic adjustments.

These include providing commercial concessions such as lower base rents, tenant improvement allowances and rent-free fit-out periods to make space more marketable to clients.

Colliers also encouraged landlords to proactively reinstate or refurbish POGO-tenanted spaces to accommodate demand from traditional and outsourcing companies.

Colliers said security deposits from previous tenants may be used to cover refurbishment or reinstatement costs when applicable.

“This approach can lessen the financial impact on tenants and ensure that spaces are returned in a usable condition,” it said.

Landlords should also  consider fitted spaces or those that are pre-equipped with essential amenities, modern design features and up-to-date infrastructure that will reduce the need for significant capital expenditures on fit-outs or renovations.

Colliers said occupiers that are looking for a capital expenditure-lite alternative in their relocation exercise may look into these fitted spaces.

Further, Colliers said landlords could also include “make good” clauses in new leases, which outline clearly the tenants’ responsibility for restoring the space to its original condition upon lease termination.

It said such clause ensures clarity and reduces potential disputes.

“Space surrenders from POGOs and non-renewal of pre-pandemic leases are expected to outpace demand, which will result in a negative net take-up by yearend. This development poses a challenge for property owners with high exposure to POGOs, who may face difficulties in finding new tenants to fill the vacated spaces,” Colliers said.

However, Colliers expects the effect of the POGO ban to only be temporary and not have a lasting effect on office demand activity as traditional firms and IT-BPM companies continue to take up space.

Colliers expects rents  to remain stable due to the expected increase in lease surrenders, subdued take-up from outsourcing firms and the potential impact of the POGO ban on the office market.

It reported that average rents in Metro Manila in the second quarter only grew slightly by 0.9 percent from the previous quarter.