Store openings in recently opened malls boost absorption

• Net absorption rose to 35,300 sqm in 1Q24, due to a surge in store openings in newly-opened malls in Makati City and Paranaque City in 4Q23, as well as fewer store closures. Food & Beverage (F&B) continued to lead the store openings in 1Q24. One Ayala Mall in Makati City, which opened in 4Q23, had a spike in openings in 1Q24, and the vacancy rate fell to 35.5% from 54.6% in the previous quarter. 
• Putien in Taguig City and Haidilao in Pasay City were among the significant F&B openings in 1Q24. Meanwhile, store closures declined further by 8.7% q-o-q in 1Q24. F&B also topped closures at 37.2%, followed by general retail at 13.7%. California Pizza Kitchen in Muntinlupa City and Oh My Greek in Taguig City were the notable pull-outs in the quarter.

A lack of significant supply and fewer closures lower vacancy

• Around 2,450 sqm of additional retail space entered the market in 1Q24 with the opening of the third floor of The Shops at Ayala in Makati. Meanwhile, the opening of Phase 2 of Gateway Mall 2 and Opus Mall in Quezon City, as well as Phase 2 of Mitsukoshi Mall in Taguig City, slipped to 2Q24. They will add around 76,000 sqm of retail space and may raise vacancy levels in the near term.
• The vacancy rate declined by 54.7 bps to 7.5% in 1Q24, the first decrease since 4Q22, due to a jump in store openings from newly-opened malls the previous quarter, combined with reduced store closures and a lack of significant supply added during the quarter.

Retail financial metrics decline in 1Q24

• Average retail rents dropped by 1.2% q-o-q to PHP 1,705 per sqm, per month, owing to overall lower rates recorded in Makati City and Mandaluyong City. However, most of the retail malls kept their rents steady to maintain leasing demand.
• Capital values fell by 0.5% to PHP 228,139 per sqm as investment activity remained slow due to persistent economic headwinds. The central bank kept the interest rate at 6.5% for the third straight meeting, with no indication of a rate cut in the near term. However, the retail market remained resilient in 1Q24, owing to a sustained volume of store openings, particularly from foreign brands.

Outlook: Lean season expected to cool lease activity

• The lean season and the addition of a significant volume of supply in the first half of the year may put additional pressure on vacancy levels. Nonetheless, numerous soon-to-open stores were still tallied in anticipation of the end of the lean period. Sustained leasing volume may also help maintain vacancy rate stability despite the expected significant supply in the next few quarters.
• Rents are projected to remain stable in the near term, as operators may hold rates steady to stimulate demand among retail brands. It is also worth noting that some retail malls are revamping their establishments to offer consumers a better mall experience, which may result in higher rents in the medium term once renovations are done, as the value of leasing space may increase.