Understanding frictional vacancy rates in the Philippine office property sector
May 26, 2015 / By Claro dG. Cordero Jr.
In a rising market, the frictional vacancy rate provides an indication of where market rents are expected to start increasing after the equilibrium occupancy level has been reached. It is also used as a leading indicator by developers when exploring development opportunities.
In the Manila office sector, as expected, the vacancy rate has an inverse relationship with market rents. Since the market bottomed out in 2004, vacancy rates have hovered below 10%, except in 2009, when vacancy rates climbed to 10.4% and market rents declined by almost 10%. It was also in 2009 when developers started delaying project launches and completions. Going by this trend, the frictional vacancy rate for the Manila office market should be about 10%.
Source: JLL Research
Amid the growing level of supply, concerns about rising vacancy rates abound. For the last few years, the Philippine office sector has been in a construction boom. Annual completions of office space in the last five years have been growing at a compound annual growth rate of 10%. Over the next four years, there is approximately 3.0 million sqm of office space to complete in Metro Manila alone.
The general direction of vacancy rates in the office sector, however, can be gleaned from the healthy take-up rate, which has been riding on the back of demand from the offshoring & outsourcing (O&O) sector. In 2014 alone, gross take-up reached approximately 497,000 sqm, while new completions were only 179,000 sqm. As a result, the vacancy rate dipped further, from 4.7% in 2013 to 4.1% in 2014. Assuming modest take-up going forward, the local market could breach the frictional vacancy rate within the next three years.
However, the growth performance and dynamics of the office demand drivers have been quite exceptional in recent years. The O&O sector coupled with expanding multinational companies (mainly the financial and manufacturing/logistics industries) are also expected to strengthen as the economy enters into a new growth phase in the medium term. Expansion demand from these industries is projected to remain consistent over the next few years, ensuring the continued absorption of the new office supply. As vacancy rates in the medium-term move closer to the frictional level, we can also expect developers to hold back new launches.
Given how the Manila office market has performed over the last few years, I believe that these market dynamics will find a way to balance the supply to meet demand, allowing the long-term fundamental growth of market rents to continue.
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