Mixed tenants driving growth in office market

The strong demand for office spaces in Metro Manila is expected to be sustained in the next five to 10 years, even with looming concerns over the second tax reform package, as the market diversifies its tenant mix, a property research and consultancy firm said.

On the sidelines of its first quarter property market briefing, Colliers International senior research manager Dinbo Macaranas said the impending passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Package 2 is not likely to affect existing business process outsourcing (BPO) tenants in the country.

“I wouldn’t say it’s a non-issue because they’re lobbying for it. It’s a concern for them, but what we are seeing as far as the closed deals in the market, our numbers are still quite positive,” Macaranas said.

Colliers reported that tenants in the Metro Manila office market are moving up the value chain, with transaction volumes of knowledge process outsourcing (KPO) firms accounting for 28 percent of transaction volumes in the first quarter of the year, higher than its 16 percent contribution in transaction volumes for full year 2017.

Among the major KPOs that closed deals during the quarter were Amazon, Google, Accenture and ING.

“These transactions were closed across submarkets with deals ranging between 3,700 sqm to as high as 49,000 sqm,” the Colliers report said

Net take-up for the first quarter reached 390,000 sqm.

“Colliers forecasts a six percent growth in net take-up over the next three years, driven by a more diversified tenancy mix,” the report added.

The property consultancy firm said the strong demand from the KPO sector is a welcome development amid concerns of a potential cut in fiscal tax incentives for outsourcing firms.

“If TRAIN 2 is passed, it will limit the income tax holiday to four years, and implement a sunset provision on the prevailing favorable tax rate of five percent on gross income instead of applying it perpetually,” Colliers said.

Macaranas, however, said while the continued demand from KPO firms is a good indication that they are here to stay, some firms may opt to locate in other competitor countries in the region due to lower costs, if TRAIN 2 is passed.

“Some will push through with their expansion, some may not pursue their expansion given the TRAIN law because cost is still a factor tenants consider. We’re talking about a reduction in terms of incentives,” Macaranas said.

Despite this, Macaranas said it is unlikely for existing tenants to back out from the Metro Manila office market.

“It’s quite unlikely because they’re continuously expanding even in the next 10 years,” Macaranas said.

“Definitely, incentives will have an impact. But today as we mentioned, market is still quite strong,” he added.

Macaranas added that the office market continues to see a diversification of its tenant mix, which is also seen to fuel demand in the sector.

Colliers emphasized that in the last five years, the office sector has been characterized by different industry drivers, with BPO voice being a major sector since the early 2000s.

Last year, the emergence of offshore gaming firms significantly contributed to the demand, while transactions from KPO firms are now driving up transaction volumes in the first quarter.

“Consistent with our view back in 2017, we see a more diversified tenancy mix across the market,” Colliers said.

Moreover, Colliers said it foresees a market that is due for an upgrade driven by shifting tenant profiles that cater to the more discerning KPOs, MNCs and traditional occupiers.

“Given this, naturally, the market moves from basic structures to more spacious, LEED certified buildings, with more energy efficient systems, consequently improving the overall experience of employees and visitors alike,” the property consultancy firm said.