New wave of developers keeps office mart vibrant
Construction giant Wilcon Home Depot and retailer Mercury Drug are among a new wave of office developers now competing with established real estate brands like Megaworld, SM Prime and Ayala Land to meet the work space needs of the BPO industry projected to continue expanding for the rest of this decade.
In the past two years alone, the BPO industry’s number of full time employees (FTEs) grew from one million in 2014 to 1.2 million in 2015 and is likely to expand to a projected 1.3 million in 2016, according to data provided by JLL Philippines.
Sheila Lobien, JLL national director, noted 1.2 million FTEs would require an estimated office space of 4.8 million square meters. The projected 1.3 million FTEs in 2016 would need a total of 5.2 million sqm or an additional 400,000 sqm from the 2015 level.
Like other boutique office developers, niche developer Panorama Development Corp., which initially focused only on residences and warehouses, now has an office portfolio of close to 70,000 sqm spread over three towers. More than half of its inventory has been leased even if the third building is still to be completed this year. In early 2015, Morning Star’s three buildings offering a total 66,775 sqm were fully leased.
The market has been favorable to those who invested in the office segment five or six years ago, according to Lobien. But following an estimated supply glut of close to 800,000 sqm by the end of this year, new real estate players are forewarned to strategically time building completions and to avoid adopting a herd mentality to avoid vacancies.
JLL head of research, consulting and valuation Claro Cordero said BPO demand, which has been driving the Philippine office market for over a decade, is expected to continue growing.
“Supply spiked in 2015 and again is most likely to peak in 2016. Building completions in 2017 and 2018 have been projected to decline,” he said. He expressed confidence the oversupply will be fully absorbed in the next two years as the rate of growth in supply has simply been higher than the rate of growth of demand.
Meanwhile, the recurring income streams offered by rental leases continue to be attractive to businesses with more cash than they need at the moment. According to Cordero, most of these boutique office players appear to be investing in real estate as a means of diversification. “You don’t want to be exposed only to one segment of the economy. You plan for the rainy day by venturing into property.”
His observation is further supported by a JLL global report that “there is a greater propensity to save and a greater proportion of these savings are expected to target real estate.” In addition to providing stable cash flows, office properties occupy land that appreciates over time.
Cordero explained with office yield rates now at seven or eight percent, firms that are diversifying into the property sector would rather finance their investments with borrowings pegged generally between five or six percent. He explained: “They can finance their properties through borrowings without taking out money from their own business and still enjoy the benefits of diversification.”
In addition to established office developers, boutique office players provide lessors more options. They are more willing to offer new options like energy efficient spaces with LEED certifications in a bid to attract the attention of office occupiers. Moreover, competition pushes prices down, added Lobien, a factor that generally keeps the market active and vibrant.