The third quarter of 2021 saw the start of mass vaccination in the country, but also a sharp increase in COVID-19 cases, leading to ECQ implementation in August, travel bans, and extension of work-from-home (WFH) arrangements. All these affected the real estate landscape for the quarter, including a continued subdued lease activity in the office and residential sectors, according to real estate services and consultancy firm JLL Philippines.

In its Q3 2021 real estate market overview webinar, moderated by broadcast journalist Raine Musngi, JLL Philippines bared that while the first half of the year saw growth in office take-up at 181,458 sqm in Q1 2021 and 180,504 sqm in Q2 2021 from 99,633 sqm in Q4 2020, this slowed to 72,000 sqm in Q3 2021 (-35.7% y-o-y).

Despite lower take up and increasing vacancy, overall rentals hold steady. Average monthly rent in Metro Manila in Q3 was around ₱1,082 per sqm, the same rate from Q2, but 5.6% lower compared to the same quarter last year, which was at ₱1,147 per sqm.

Makati and Taguig still register the highest average monthly rent at ₱1,324 and ₱1,244 per sqm, respectively, while Manila has the lowest at ₱637 per sqm. However, all these remain below pre-pandemic levels.

“What’s interesting is the widening gap between the asking rates and the actual transacted rates by as much as 30% lower, and this is reflective of the negotiation flexibility that landlords are allowing to find a win-win arrangement between them and the occupiers to navigate the current market conditions,” said Janlo de los Reyes, JLL Philippines’ Head of Research and Consultancy.

The condition of the office sector has led to continued weak residential lease demand in Metro Manila due to continued WFH arrangements, especially with Philippine Economic Zone Authority (PEZA) memorandum allowing BPO (business process outsourcing) employees to work from home. BPOs have been one of the main demand drivers of the office sector pre-pandemic.

Sell side for residential condominiums, however, remains resilient, with the luxury pre-selling market recording a 0.5% take-up increase q-o-q.

Broadening demand for logistics and industrial spaces

The logistics sector continues to be a bright spot in the country’s real estate landscape, and there is also a continued rising interest for industrial spaces.

“The logistics and industrial sector now has a significant share in terms of the space volume due to demand from e-commerce, third-party logistics, and manufacturing by FMCGs (fast-moving consumer goods), especially with the holiday season and sales promos,” explained de los Reyes. “Interest in data centers also continues to pick up, adding to the increasing volume of industrial transactions and requirements.”

Within the logistics and industrial domain, 37% of inquiries are for logistics spaces, 49% for FMCGs’ manufacturing, and 14% for data centers within the Greater Manila area, with typical requirement usually ranging from 1-7 ha.

Retail gear up for upcoming holidays; hotels re-open and re-purpose

The retail sector saw slower store closures and stable take-up in Q3 ahead of the holidays. Average vacancy rate went down to 6.1% from 6.7% in Q2. Despite the improved take-up, current vacancy rates remain elevated compared to 3.7% in the same quarter last year.

“We still see a lot of unoccupied spaces within malls in Metro Manila, but among the take-ups, the food and beverage (F&B) segment continues to lead new store openings,” said de los Reyes. “Local brands are also faring better than foreign brands in terms of space take-up.”

Rentals in retail, like the office sector, also reflect flexibility by landlords, with around 10 to 15% discount given to occupiers.

Flexibility is also the name of the game for more hotels as more operators are trying to diversify their catchment growth and drive demand.

In Q3, 61% of hotels were quarantine facilities, 19% remained non-quarantine facilities, while 20% became multi-use (only partially quarantine/non-quarantine). Of this 20%, 63% are upscale and luxury developments, one of the most affected segments in the hospitality sector.

Flexibility key to resiliency and growth

For de los Reyes, shifts in the property and policy landscape over the next 12 months may influence movement in real estate.

“With the PEZA WFH memorandum extended up to March 2022, subdued leasing activities for the office and residential sectors may continue,” he explained. “The national elections may also dampen leasing and investment activities across the board as investors may slow down in their decisions and activate again when the market stabilizes.”

For occupiers, many are pushing office re-entry timelines to 2022. “Many are still uncertain about their space requirements in the next years, with some already piloting hybrid work setup, and this will push a lot of the leasing decisions up until the fourth quarter, or even next year,” he continued.

Supply will peak mostly in 2022 for most the sectors, with anticipated new stock of 714,000 sqm for office, 535,300 sqm for retail, and 6,300 rooms for hotel.

“It’s still going to be a continuous fluid environment that the real estate market will be in. Flexibility and agility, which has been a recurring theme across different sectors, will serve as key instruments in treading uncertainties in the market,” de los Reyes said.

To add to this, JLL Philippines’ Vice Chairman Joey Radovan highlighted the crucial role of strategic advisory.

"Market uncertainties have made tactical approach to corporate real estate very challenging because capital commitment is not an option at this point. In JLL, we work with clients to develop a long-term portfolio strategy to identify opportunities, understand the challenges and risks, and find data-driven real estate solutions. This strategic advisory approach helps them proactively and strategically prepare, have a sense of certainty and stability, and avoid drastic decisions if the market further deteriorates," Radovan concluded.

JLL regularly holds knowledge-sharing events and publishes thought leadership pieces on the latest trends in the real estate market. To know more, follow JLL’s social media pages on Facebook and LinkedIn.

JLL has been operating in the Philippines since 1997 as a 100% wholly owned entity and currently manages about 4.4 million square meters of real estate with a workforce of over 1,100 employees. With more than two decades of local expertise working hand-in-hand with its global legacy, JLL provides to the Philippine real estate market an unparalleled synergy of services with a strong commitment to achieve real estate ambitions through future-ready approaches. For further information, visit http://www.jll.com.ph/.