Weak office property demand seen to worsen

It will likely get worse before it gets better for the office property sector amid the unfolding COVID-19 pandemic, but tenants and landlords can both survive by accepting give-and-take arrangements.

This is according to property consulting firm Colliers International Philippines, which estimated that office demand in the country had declined by 24 percent year-on-year at this time. On the supply side, the projected office stock for 2020 was reduced by at least 20 percent as developers halted construction due to their workers being unable to go out and travel to their properties.

Vacancy rate stood at about 5 percent but Colliers said this was expected to inch up because of the softening of demand. During the global financial crisis of 2008-2009, the vacancy rate reached 8.6 percent while rents fell by about 30 percent.

With the directive by the Philippine government for owners of malls to give rent relief to their tenants, the office occupiers started asking their own landlords for the same relief—“not to gain, but all in the name of outlasting this pandemic,” Colliers said in an April 13 research note.

Colliers noted that the landlords, on the other hand, were also looking to find relief elsewhere, for instance, waiting for banks to grant reprieve on corporate loans.

In the meantime, both landlords and tenants continued to spend on salaries of their employees and some other fixed expenses.

“Survival is a question of how much cash resources a company has to withstand this pandemic. Some of the clients we have spoken to only have cash that will last two to three months, which is reflective of the fast-paced and fluid economy that we are operating in,” Colliers said.

Colliers suggested that tenants should also look at possible “gives” to the landlords in exchange for rent relief, rent abatement, adjustment in the dates of handover, lease and rent commencement and longer rent-free fit-out period.

The consulting firm said the following concessions may be worth considering:
– apply the advance rent to the last three months of the lease term;
– apply the security deposit after the advance rent is applied, subject to replenishment immediately thereafter this pandemic;
– rental deferment for a few months in exchange for a longer lease term equivalent to the length of the rent deferment period;
– rental discount for the duration of the pandemic to be paid by the occupier 12 months after in cash or in staggered basis;
– rent-free period within the lease term can be exchanged and applied now;
modification of the rent and escalation structure to recover the rent relief extended;
– adjustment in other fixed charges like common area charges and aircon charges equivalent to the savings on water and power consumption;
– waive parking rental;
– waive signage rental;
– removal of pre-termination option;
– removal of the “no reinstatement” provision
– removal or modification of the sublease and assignment provision
– revision of the renewal provision to modify a collar on renewal rent;
– tightening of the obligations of the occupiers in the contract of lease (like shortening of curing periods); and,
– softening of any interruption of services provision in favor of the landlords.

“The spirit of Bayanihan is being displayed proudly by the Filipino people. We believe that this can also be extended to the commercial real estate industry such that whoever has the capability should help those who need a lifeline in the short-term so that everybody wins in the long-term. Survival should be a shared cause,” said Dom Fredrick Andaya, director at Colliers International Philippines.

In the past years, Colliers noted that business process outsourcing (BPO), Philippine offshore gaming operators (POGO) and traditional occupiers comprised roughly 30 percent of total office lease transactions annually.

“With the global economic recession, it is expected that the BPO expansion will slow down initially, but a strong rebound is expected after, like what happened several months after the GFC in 2008-09. While the wave of BPO expansions happened after six to nine months after, the recovery from COVID-19 may be longer as the impact could be worse,” Colliers said.

It added that the growth of the POGOs remained uncertain due to health concerns, given that mainland China was the epicenter of the COVID-19 pandemic. At the same time, China has initiated a crackdown on POGOs. Gambling is illegal in China, which is likewise concerned about money laundering via POGOs.

“While a rebound is sure to happen since the property sector is cyclical in nature, the real question is: When is the end of this? Meanwhile, both the landlords and occupiers, who are equally affected, are assessing how best to survive this onslaught,” the research said.