Office space vacancy rising, rental fees falling

Metro Manila’s office property space is moving past the 10-percent vacancy rate for the first time in more than a decade and may remain at the double-digit level in the next two years amid a challenging environment brought about by the coronavirus pandemic, property consulting firm KMC Savills Inc. said.

Leasing activity continued to falter all throughout the metropolis with almost 75,300 square meters of Grade A office space vacated in the fourth quarter of 2020. With 1.1 million sq m of office space on tap for 2021, KMC Savills sees more pressure in the market. However, pandemic-induced construction delays—which may push back upcoming projects to 2022—are seen to temper the increase in vacancy rates this year.

“As this pandemic stretches out in the Philippines with no end in sight for a lockdown or even a general quarantine to reduce, the offices are more a burden than an asset to companies right now,” KMC Savills managing director Michael McCullough said in an interview on Thursday.

“There’s probably more pain ahead before it gets better,” he said.

Fred Rara, senior manager for research and consultancy at KMC Savills, added that with rental rates declining, “the market is favoring the tenants a little bit.”

Some of the Grade A or even prime buildings have slashed rents by as much as 30 percent, in some cases, resulting in rental rate falling below P1,000 per sq m for the first time since 2008, McCullough said.

In the fourth quarter of 2020, Metro Manila’s average rental rate averaged at P1,000.60 per sq m. KMC Savills sees major movements in 2021 as landlords aim to reset the market with new offerings for the first time since the onset of the pandemic.

“I don’t think tenants will ever forgive landlords who didn’t work with them during this period,” McCullough said, noting, however, that some of the boutique developers seemed to have been more flexible compared to some major developers.

Furthermore, the KMC Savills research cited the overhang from the exodus of Philippine offshore gaming operators (Pogos), which have a footprint of over 282,000 sq m of office space in the metropolis. While the Supreme Court recently issued a temporary restraining order on the 5-percent franchise tax on Pogo operators, KMC Savills believes this may only delay further decline in demand.

Citing insights from KMC Savills’ Pogo experts, Rara noted that most of the small players had completely left but even in the residential space, there were still Pogo operators looking for whole buildings.

“So it’s not 100-percent pullout especially for the big guys. But how they will operate—some will be not within the CBDs (central business districts) anymore. If this continues until the next elections, we don’t know whether the Pogos will still have an accommodative environment,” he said.

The Pogos have become a significant industry under the administration of President Duterte, who restored diplomatic relations with China and allowed Pogos to operate in the country. Apart from tightening the tax environment on the sector, however, China itself has been cracking down on Pogos amid concerns on money laundering and human trafficking, among others.

Even the residential segment—which KMC Savills earlier thought to be a relatively safe space because such projects are not heavily funded by debt—may be under pressure as the pandemic curbs the ability of some homebuyers’ to continue paying mortgages.

After the loan moratorium that banks were mandated to expand, McCullough noted that banks have curbed mortgage lending as bad loans and foreclosures rise.

“When the banks start unloading these residential properties that they own, it’s gonna flood the market with supply and if banks are smart, they will undercut the market because they already made 20 percent up to 50 percent of the value of the property [from earlier mortgage payments],” he said.

“Banks are worried that valuations will change moving ahead. If we think there’s a discount of 20 percent, why will they loan out with a collateral of 100 percent? So that’s why nobody wants to lend now,” Rara added.