Tight office space supply due to ‘precommitments’

AS MUCH AS 60 percent of office space that will be completed by property developers in 2016 would soon be out of the market due to robust demand from prospective tenants led by business process outsourcing (BPO) firms, according to property consulting firm Jones Lang Lasalle (JLL).

The new trend of “precommitments” in the office property sector underscored the need for office-seekers to plan one to two years ahead of time because occupancy demand was getting tighter, JLL local director Phillip Anonuevo said in a press briefing last week.

In 2016, close to 800,000 square meters of office space are expected to be completed by property developers, about 33 percent of which had already been precommitted.

“We don’t expect an oversupply at least in 2016,” Anonuevo said.

Based on property deals closed by JLL in the first half, 63 percent of the demand was still from the BPO sector. This was followed by retail and services (16 percent), manufacturing/pharmaceuticals (6 percent), advertising/marketing/media (5 percent) and engineering (4 percent). Banking/finance along with information technology and gaming sectors respectively took more than 2 percent each.

The preferred location for office space was still Bonifacio Global City, which accounted for about a quarter of all transactions while Makati took up 20 percent. Ortigas had a 13-percent share while Quezon City accounted for 8 percent. Outside Metro Manila, Cebu accounted for the single-biggest share of first-half office property deals at 16 percent, followed by Davao (7 percent) and Ilocos Norte (6 percent).

JLL regional director and Philippine chief David Leechiu said there were about 230,000 to 250,000 square meters of 2016 office stock undergoing leasing negotiations at present, adding to those already precommitted. “That means as much as 60 percent of office space to be completed next year can be committed as early as two months from now,” he said.

While it looked like there was a lot of supply coming into the market in the next few years, Leechiu said the reality was that once the prospective tenant started qualifying based on geography, budget or availability of Philippine Economic Zone Authority (Peza) incentives (for those classified as special economic or IT zones), there would be few options on the table. Thus the need to plan real estate needs ahead of time.

“The Philippines is becoming a very important hub for companies to cut costs and increase productivity and for many people, especially in Europe where this contagion is happening, it is going to put more pressure on companies to bring operations to the Philippines,” he said.

Apart from taking office stock ahead of completion, Leechiu said prospective tenants were seeking longer lease terms than the three- to five-year tenors that were popular in the past.

“Now it’s becoming common to see seven, eight or 10 years and they will have automatic sole option to renew for another five years,” Leechiu said. “That tells us that more and more companies realize and say—I need this to be a long-term position for the Philippines. This is not just a wait-and-see five-year type of operations. It’s going to be a 10- to 15-year exercise,” he said.

Leechiu added that there had been multinational corporations who have been present in the Philippines for 50, 60 or 70 years and suddenly realizing they don’t own anything.

“They ask why are we continuing to rent at 50 to 60 years when we could have owned something here in the Philippines and take advantage of the property boom and then redevelop assets later on? But the foreign limits prevent them from doing that. They are constrained to own 40 percent of a building, which is very difficult to find,” he said.

Leechiu is referring to the foreign equity limit on sensitive areas such as real estate prescribed by the Constitution. There had been moves to ease the economic provisions of the Constitution but discussions on this had been deferred by legislators, which Leechiu said was disappointing.

“I think we grossly estimate the power of foreign capital coming to the Philippines,” Leechiu said. “We as locals cannot possibly develop this country on our own at a time we need it.”