Office vacancy rates expected to hit double-digits next year

REAL ESTATE consulting firm KMC Savills, Inc. forecasts vacancy rates to hit double-digit figures in 2019, as more office properties are completed in Metro Manila.

KMC Savills Managing Director Michael McCullough said around two million square meters (sq.m.) of office spaces will go online in the next two or three years. Demand for office space reached 630,000 sq.m. in 2017, which he said may be sustained during the period.

“We’re just going to barely breach 10-11% ( vacancy rate), which is still a very, very healthy number in any other market. We just haven’t seen that number in a long time,” Mr. McCullough told reporters during a press briefing in Makati on Tuesday.

The last time the Metro Manila office market saw double- digit vacancy rates was in 2008, when 11% of the total stock were unoccupied for at least three quarters, according to the company.

Mr. McCullough noted the higher vacancy rate will not necessarily translate to an increase in rental prices.

“Some landlords will be a lot more flexible, particularly in mixed-use developments, where they can get additional revenue from the retail component or the residential value. They can wait it out,” he said.

Asked whether the rising rates indicate a glut in the number of office spaces in Metro Manila, Mr. McCullough answered in the negative, saying vacancy should hit at least 20% for it to be considered an oversupply situation.

This year, KMC Savills estimates 805,000 sq. m. of office spaces to come online, with more than a third to come from Bonifacio Global City (BGC). The figure is higher than the 761,100 sq.m. of office space that went online in 2017, with net absorption at 630,500 sq.m., pushing vacancies to 4.5% by the end of the year.

Offices in the Makati central business district commanded the highest monthly rental rates at P1,047.2 per sq. m. to as high as P1,500. BGC followed with rental rates ranging from P926 to P1,250 per sq.m. monthly, while offices in Ortigas are leased out for P668 to P850 per sq.m.

In contrast, KMC Savills is keeping its forecast for demand conservative at around 500,000- 550,000 sq. m., with business process outsourcing firms as the main driver complemented by offshore gaming firms.

“KMC Savills sees both industries as rising key drivers of office space demand locally. While the Philippines remains to be one of the best outsourcing destinations, the offshore gaming sector is expected to drive high absorption performance, stabilizing vacancy rates,” the company said.

The firm also reported most offshore gaming firms prefer to locate in the Bay Area, making it challenging for other areas such as Quezon City and Ortigas Center.

“Vacancies in these sub-markets have remained manageable despite the increase in stock, and we expect these conditions to hold by the end of the year,” the company said.