Recap of the Metro Manila office market in 2023

Last January, we held our Metro Manila real estate market overview, where we presented our views on the office, residential, retail, and hospitality sectors. In this blog, I’d like to discuss the office market and its performance in 2023.

Office leasing volumes in Metro Manila trended downward to around 82,000 sqm in Q4 2023 from 131,000 sqm in Q3 2023. Meanwhile, leasing volumes for the full year fell by 19.7% y-o-y to 540,000 sqm against 672,00 sqm in 2022, largely due to the sustained soft leasing conditions as the market. Occupiers continued to right-size and maintain hybrid work arrangements, which has led to an ongoing review of future office footprints, as well as caution regarding expansion activities. We anticipate leasing volumes to remain moderate as occupiers maintain their current office space strategies.

Total move-outs during the year eased to around 335,00 sqm from 570,000 sqm in 2022. This suggests that occupiers have largely decided their office strategy and footprints for the future. We expect this easing trend to continue as more occupiers realise their optimal office space requirements.

The BPO (Business Process Outsourcing) sector continued to dominate the occupational market, accounting for 72% of the lease transactions in 2023. Meanwhile, corporate occupiers captured only 28% of the transactions over the same period. We anticipate the BPO industry to keep driving the leasing market forward. The expected increase in headcount and a stronger push for Return to Office (RTO) by select BPO occupiers may generate lease demand in the future.

Vacancy levels hit our forecast of 20% by the end of 2023 due to the new supply and volume of released spaces during the year. We forecast vacancy levels to rise further by the end of 2024 to around 22% as the supply pressure of around 600,000 sqm of new office space enters the market. We anticipate overall vacancy to gradually improve by 2025, where we see a tapering of office stock.

Overall rents continued to decline, influenced by the weak leasing conditions of the market. Most landlords continued to hold on to rents, but office buildings with prolonged vacated spaces are pulling down their rates to attract tenants. We project rental rates to decline in the short term as vacancy continues to increase from the new supply with weak precommitment levels. We anticipate a recovery in the rental market in late 2025 to early 2026, when the supply pressure shall ease up.

Altogether, the outlook of the office market should remain challenging, as a result of the gradual RTO by occupiers. This may be further influenced by the ongoing review of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE law), which, if enacted, will allow firms to implement full work from home without penalty to current incentives. Nonetheless, we still expect growth in the office market owing to the sustained growth of the BPO sector that may translate to future office demand.