Shopping malls facing highest vacancy rate since Asian crisis

About 14 percent of selling space in Metro Manila’s shopping malls will likely be vacated by cash-strapped retailers—the highest vacancy rate seen since the Asian crisis—as the coronavirus pandemic has shattered consumer confidence and driven away foot traffic from crowded areas.

This is according to property consulting firm Colliers International Philippines, which also reported that the pandemic coupled with the exodus of some online gaming players, had also caused vacancy rates across Metro Manila’s office and residential properties to shoot up.

Average office vacancy rate in the metropolis is projected to hit 8.3 percent this year from 4.3 percent in 2019, likely dragging down rental rate by about 17 percent, Colliers said. In the first nine months, office transactions, including preleasing activities, slumped by 71 percent as several Philippine offshore gaming operator (Pogo) players stopped operations and left the country.

On the residential condominium space, Colliers sees vacancy rates rising further to 15.3 percent by the end of the year after hitting 12.9 percent in the third quarter. Rental rates are seen to drop by 7.7 percent before increasing by 2.5 percent in 2021 to 2022.

Residential condominium prices are likewise seen to drop by 13 percent before firming up by 2.1 percent in 2021 to 2022.

But for shopping malls, recovery may not happen until 2022, it said. In the third quarter, vacancy rate in this sector rose to 12.5 percent from 10 percent in the first quarter as major mall operators suffered from as much as 50-percent drop in foot traffic compared to pre-COVID-19 norms.

From 2016 to 2019, vacancy rates at shopping malls had been stable at 8-9 percent. The last time the Philippines had seen as 14-percent vacancy rate was in 1999 during the Asian crisis, but the peak was seen at 19 percent in 2001.

“The pandemic has caused a significant interruption to the long run of growth of the Philippines’ consumer-driven economy, severely affecting mall operators and retailers,” Colliers said in a research note written by Joey Roi Bondoc.

A number of footwear and clothing brands have closed their physical mall space as they fully migrated to online selling. Some retailers of personal accessories and miscellaneous items have also expan­ded their online reach and are not likely to take up new brick-and-mortar space in the next six to 12 months, Bondoc said.

As such, rental rates in shopping malls are seen to decline by 10 percent this year—deeper than the 7.3-percent contraction seen in 2009, during the global financial crisis. Average rents may decline by another 2 percent in 2021 before a slow rebound of 1 percent starting 2022, Bondoc said in the report.

Colliers believes that shopping malls must innovate to remain relevant. In recent years, shopping malls have increased their share of tenants to food and beverage (F&B) relative to fashion houses but many F&B outlets have come under pressure during the pandemic.

“F&B still works except these are F&Bs that are more conducive to deliveries, such as the ‘dark kitchen’—types like Grab Kitchen—which is like one big kitchen with different concessionaires and easily accessible to riders. You can now have a supermarket which could tie up with the likes of Lazada or other delivery platforms,” Colliers International Philippines Richard Raymundo said at a briefing on Thursday.

What is important now is to be have the proper logistics, like ample parking space for riders.

“There will be changes in the physical space,” he said. Instead of having 25-30 percent of space devoted to kitchens, Raymundo said restaurants might have to reconfigure their designs to be more suitable to delivery operations.

Colliers said landlords seeing rising vacancies in their malls should explore the viability of converting vacant space into flexible workspaces, subject to strict compliance with social distancing measures. Given that malls are near residential communities, this arrangement is seen to significantly reduce employees’ commuting time, and improve work-life balance.

Colliers also recommends the conversion of vacant space into fulfillment centers or micro warehouses to enable retailers reach last mile deliveries.