Office vacancy rate hits 20-year high

MANILA, Philippines —  Metro Manila’s office vacancy rate in the third quarter hit its highest level in 20 years as firms streamlined office space requirements and new supply was added to the market, according to commercial real estate services firm Cushman & Wakefield.

In its latest MarketBeat report, Cushman & Wakefield said the average vacancy rate in Metro Manila by the end of the third quarter reached 18.2 percent, the highest level estimated since the second quarter of 2004.

It said an additional 114,000 square meters of office space was added to the market.

“This, along with the significant volume of returned office spaces due to major corporate occupiers rationalizing their office needs, has increased the volume of vacant spaces,” Cushman & Wakefield said.

The firm expects vacancy rates to remain high due to the total ban on Philippine offshore gaming operators (POGOs) and the implementation of the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy or CREATE MORE bill.

The bill, which just needs the signature of President Marcos to become law, supports flexible work arrangements and is likely to lead to more vacant spaces.

According to Cushman & Wakefield’s report, average asking rents for Prime and Grade A office spaces have experienced a slight decrease in the third quarter, marking the fourth straight quarter of consistent decline.

In particular, the average headline monthly rent of prime and grade “A” developments in Metro Manila closed at P1,003 per sqm from the previous quarter’s P1,010 per square meter and from P1,041 per sqm in the same quarter of last year.

“The Metro Manila office market is exhibiting a slower-than-expected recovery in Q3 (third quarter) 2024,” Tetet Castro, director and head of tenant advisory group at Cushman & Wakefield said.

She said the initial effects of the total POGO ban and amendments to the CREATE are already being felt and elevated vacancy rates and lower headline rents are expected in the medium term.

Claro Cordero, director and head of research, consulting and advisory services at Cushman & Wakefield said the most significant increases in vacancy rates were seen in mature markets like Pasay City, Taguig City and Makati City.

“The high concentration of POGO companies in Pasay City and new completions with low pre-commitment levels in Taguig City and Makati City have contributed to these elevated vacancy rates,” he said.

He said the US presidential election, which brings uncertainty on key policies affecting American firms’ outsourcing activities, as well as the increasing use of artificial intelligence especially in the information technology - business process management (IT-BPM) industry, could potentially limit the demand for office spaces in key markets if stakeholders do not fully adapt to the changes.

“It is crucial for industry stakeholders to develop policies and programs that equip and upskill workers in the IT-BPM sector with the necessary technical skills. This will help them navigate the evolving demands and seize new opportunities, ensuring steady industry growth and continued demand for office spaces in the long term,” Cordero said.

In terms of the residential segment, he said the recent monetary policy easing may not immediately translate to stronger demand for residential developments in the near term.

As for the retail shopping sector, he said the seasonal surge in spending is anticipated to enhance retail sales and increase customer visits, but the medium-term growth prospects remain moderate as consumers make changes to their spending habits in response to the gradual reduction in living costs.

As such, he said retail spaces vacated by restaurants, services and specialty shops catering to POGO employees, as well as those in mall developments that have yet to adapt to new shopper preferences, will add to the available stock in the market.

Meanwhile, the industrial and hotel sectors are seen as growth segments.

“Traditional tenants, such as those in the manufacturing industry, which have consistently driven industrial estate demand over the years, are expected to further expand the segment,” Cordero said.

He added that travel demand is expected to increase across key destinations in the country.