In Q3 2024, the office market of Metro Manila saw a decline in net take-up, the first negative quarter since Q4 2021, driven by POGO lease terminations.
The office market in Metro Manila has experienced its first negative net take-up in a quarter since Q4 2021, as the Philippine government’s ongoing ban on Philippine Offshore Gaming Operators (POGOs) continues to impact leasing activity.
The decline, which took place three months since the pronouncement of the POGO ban, has been driven by POGO lease terminations as well as non-renewal of leases that were closed before the pandemic.
According to recent reports from Colliers as quoted by the Business World, the Metro Manila office market saw a decline of 33,000 square meters in net take-up for the third quarter (Q3) of 2024, as lease terminations and non-renewals by POGO operators grew more prevalent. This marks a significant shift in the market, with concerns over rising vacancies and potential stagnation.
Despite these challenges, key indicators show that the market is far from collapsing. Demand from traditional office tenants and outsourcing firms, particularly in the Information Technology-Business Process Management (IT-BPM) sector, has remained strong, offering cautious optimism for the remainder of the year.
POGOs Head for the Exit
The Philippine government's crackdown on POGOs, which have long been a substantial presence in the local office market, has contributed significantly to the current vacancy issues. As of Q3 2024, a total of 57,000 square meters of office space was surrendered by POGO operators, and an additional 157,000 square meters is expected to be vacated by year-end. At its peak, the POGO sector leased approximately 1.3 million square meters of office space in Metro Manila, but today, their share of the market has dwindled to just 275,000 square meters, representing a mere 1.9% of the total office stock in the region.
If not for the POGO ban, net take-up for 2024 would have likely exceeded 195,000 square meters, surpassing the total take-up for 2023. However, with the ongoing surrenders, Colliers now forecasts a flat or zero net take-up by the end of the year, indicating no net change in the amount of occupied office space from 2023 to 2024.
Robust Demand from IT-BPM and Traditional Occupiers
Despite the POGO-driven vacancies, demand for office space in Metro Manila remains resilient. The IT-BPM sector, along with traditional firms such as government agencies, continues to account for the bulk of office transactions in the region. In Q3 2024 alone, there were 651,000 square meters of office transactions recorded, with 192,000 square meters being new leases.
Notably, 53% of all transactions in the third quarter were attributed to traditional firms, including government agencies, while outsourcing companies (3POs) accounted for 29% and POGOs for just 11%. The remaining 7% was from shared services firms. While overall transaction volume was slightly lower compared to previous quarters (down 12% from Q2 and 2% from Q3 2023), the strong performance from traditional and outsourcing firms indicates a continued appetite for office space.
The expansion of IT-BPM companies is a key driver of office demand, accounting for 70% of space take-up in the sector. Expansion activity is particularly pronounced in areas like Makati Central Business District (CBD), Fort Bonifacio, Quezon City, and Alabang, where many major outsourcing firms are located. These areas are expected to see continued growth in office demand, especially with the passage of new tax incentives in Quezon City that encourage office expansions and relocations.
Provincial Markets Gaining Ground
The positive performance of Metro Manila’s office market is mirrored in regional markets, where provincial office transactions have been steadily rising. In Q3 2024, 189,000 square meters of office space was transacted outside Metro Manila, up from 155,000 square meters in the same period of 2023. Cebu, in particular, has emerged as a key player, capturing 32% of total provincial transactions, and now rivals primary Metro Manila CBDs like Makati and Ortigas in terms of leasing activity.
The growing demand in provincial markets is largely driven by outsourcing companies seeking to expand their operations beyond Metro Manila. With regional markets now accounting for nearly 29% of nationwide office deals (up from 20-25% in previous years), landlords are encouraged to increase their office space offerings in these areas to meet demand.
Higher Vacancy Rates and POGO-Exposed Locations
As a result of the POGO sector’s exit, the vacancy rate in Metro Manila’s office market has risen slightly, reaching 18.5% in Q3 2024, up from 18.3% in Q2. The increase is most noticeable in areas with high POGO exposure, such as the Bay Area and Makati Fringe, which are expected to see higher vacancy rates by the end of 2024.
Developers and landlords with office buildings previously occupied by POGOs are advised to offer additional concessions to attract new tenants. These spaces may be reconfigured or retrofitted to meet the needs of traditional firms or outsourcing companies, with flexible lease terms and tenant improvement allowances serving as attractive incentives.
Silver Linings Amid the Challenges
While the office market faces challenges, there are still silver linings that offer hope for a recovery. The resilience of demand, particularly from the IT-BPM and traditional office sectors, suggests that the market is far from stagnant. High-demand submarkets such as Makati, Fort Bonifacio, and the Bay Area continue to see strong leasing activity, while provincial markets are showing promising growth.
Landlords who can adapt to the evolving needs of tenants—by offering flexible, sustainable, and well-located office spaces—are in a strong position to capitalize on market opportunities. Furthermore, with Metro Manila’s overall vacancy rate expected to rise to 20.5% by year-end, developers with low vacancy rates may be well-placed to command higher rents and secure long-term tenants.
Looking ahead, external factors such as the outcomes of the 2024 U.S. elections may also have an impact on the business environment, influencing future demand for office spaces in Metro Manila. Despite the uncertainties, the market’s overall resilience and ongoing demand for office space point to a cautiously optimistic outlook for the remainder of the year and into 2025.
Read related article: Metro Manila Office Vacancy Rate Hits 20-Year High
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