Glut in Office Buildings to End Sooner

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Glut in Office Buildings to End Sooner
Manila, Philippines

Colliers

Colliers International Research Comment: Market commentators have pointed out that the oversupply of office spaces in Metro Manila will not last long as existing supply of office buildings are expected to dry up soon, effectively stabilizing rents and prices. This is quite possible and stabilizing rents may happen as early 1Q 2010. But the fact is there: office rents are currently down by 25-30% from its peak in mid-2008. The glut in office space supply coupled with a weak demand from 3Q08 – 2Q09 has made the best buildings in Makati CBD substantially cheaper. In the first place, no one expected those BPO locators to settle for P1,200/sqm when they located in Makati CBD during the 2005-2007 period. But they paid more than what was expected, because no available office spaces were offered back then. But the tide has changed: this (commercial/office property) is a tenant’s market. Yes, the correction period and the oversupply of office spaces in Metro Manila will not last long-it will not last longer than what was observed in the post-Asian Financial Crisis period where it took around five years for the office market to finally get on its feet. What has changed: The BPO industry. Around 70% of all office space transactions are coming from the BPO/O&O industry that requires an additional 200,000-300,000sqm of new office space per year. If all goes as planned, new office spaces will be almost filled by end-2010 and developers may start building new offices at that time. Developers have push-button BPO-type building projects that can be delivered in 12-18 months time and this will be good for the industry since the demand-supply gap may be lessened by faster delivery of buildings. But these will not happen without an important repercussion: overall office rents in Metro Manila are substantially cheaper by at least 30% (especially in Premium and Grade A buildings). This, and the fact that developers are targeting BPO tenants who are cost-and-operational efficiency-conscious, makes us think that the artificial (and sudden) increases in rental rates we’ve seen in 2006 and 2007 are not going to happen sometime soon.