Manila: Office

Demand

Healthy office demand continued to support strong take-up of office space within Makati CBD and Bonifacio Global City (BGC). This was evidenced by an increase in net absorption, which was recorded at 32,500 sqm in 4Q14.

The average vacancy rate registered a slight increase from 3.9% in 3Q14 to 4.1% in 4Q14, but remained healthy on the back of robust leasing demand from various sectors. Notably, Grade A office developments located in Makati CBD and BGC maintained healthy occupancy levels, as most office developments remained fully occupied while other developments posted relatively low vacancy rates.

Offshoring & outsourcing (O&O), IT and software firms continued to buoy demand for office space in the local property market in Metro Manila. Other notable sources of demand during the quarter included firms from the manufacturing, logistics, pharmaceutical, marketing and services sectors.

Key lease transactions during 4Q14 included an O&O firm occupying 3,570 sqm in Net Square and a marketing firm occupying 1,410 sqm of office space in Frabelle Business Center.

Supply

Three office developments were completed in 4Q14, adding a consolidated total office supply of 37,800 sqm. However, five office developments initially expected to become operational within the quarter were not completed likely due to construction delays.

Upcoming office developments scheduled to complete in 1Q15 include MDI Corporate Center, Orion, Techzone, Uptown Bonifacio Tower 1, One World Place and Wilcon IT Hub. The six buildings are expected to add a consolidated 148,000 sqm of office space.

Asset Performance

Sustained office demand from both multinational and local firms of different sectors supported the continued growth of office rents and capital values. Average rents posted growth of 1.6% q-o-q in 4Q14, reaching PHP 10,538 per sqm per annum. Meanwhile, average capital values were recorded at PHP 111,885 per sqm, posting a slightly faster growth of 3.6% q-o-q given strong investor interest buoyed by the continued positive performance of the local property market supported by recent credit rating upgrades.

Investment yields posted a slight decrease of 20 bps q-o-q to 9.4% in 4Q14.

12-Month Outlook

Fifteen office developments are scheduled to complete in 2015, adding a consolidated total floor area of around 435,500 sqm. The significant volume of upcoming office space in the next several quarters may create upward pressure on vacancy rates during 2015.

Demand from various segments of the O&O sector, such as business processing outsourcing and knowledge processing outsourcing, are likely to remain among the major sources of demand during 2015. Other sectors, such as financial services, IT and software, among others, may likewise buoy demand for office space. Both average rents and capital values are likely to sustain an upward trend, in line with sustained office demand.

Note: Manila Office refers to the Makati CBD and BGC Grade A office market.