I’ve always prided myself in driving business that is in the best interest of our clients. The post-COVID-19 market is unique though. Here are my takeaways on the Philippines’ office market:
- It’s still too early in the COVID-19 crisis to make any forecast on when the BPO market, and the office market in general, will resume its absorption of existing and upcoming space. The full impact of the crisis has yet to be felt, and the ripple effects could take up to a year to fully reveal themselves. Any pipeline deals earmarked for 3Q-4Q 2019 or later are contingent upon what happens over the next couple of months. Aside from the physical market, the financial markets will undergo a period of reconciliation which will affect the financing of expansionary projects. While there may be some outlier companies in e-commerce, gaming, or healthcare for example who may expand this year, the overall market will face a contraction compared to 2019. Another consideration is there will be a new supply previously not accounted for caused by downsizing and closure of some companies. The downsizing will be made more difficult for the tenants due to the market being heavily favored on the side of the landlord for several years now. Contractual terms like deposits, advance rents, lack of pretermination clauses, etc. are in their favor. It’s up to each landlord on a case to case basis whether they will be amenable to working with these tenants in minimizing the fallout and finding a win-win solution. After all, these are the same tenants that have propped up the market for so long.
- The office market has been extremely resilient over the past 15 years through stretches that included various natural disasters, regulatory changes, the global financial crisis, SARS pandemic, and more while struggling through a severe lack of infrastructure. The resiliency originates from the BPO sector and its multiplier effect on job creation and other business opportunities, the POGO sector and their capacity to spend more on rent than any other tenant, and the increase in demand from local firms as the GDP has increased by an annual average of 5.98% over the past 15 years. So many legs are driving the Philippines office market that have generated an annual demand for office space north of 1,000,000 sq.m. per year for several years now. In 2019, the take up was over 1 million sq.m. in Metro Manila alone. Factor in Cebu, Iloilo, Clark, and the other secondary cities, and the take up is over 1.6 million sq.m.
- The Philippines has been perfectly positioned over the years to respond to global market conditions since the demand from BPOs for office space increases when global economies are booming and BPOs are securing new contracts while their clients are expanding, but at the same time, when global economies are contracting companies, in turn, need to cut costs and they do so by outsourcing. It’s an old adage but in this unique scenario it doesn’t apply, at least until the full impact of the current crisis is revealed in the markets where BPOs source their clients.
- Interesting and true story – circa 2002 there was concern amongst the local business community over the longevity of the BPO industry due to the arbitrage nature of the business. The primary concern was that they will constantly be moving onto the next low-cost destination. It’s absolutely amazing how much the industry has evolved. It’s not about the lowest cost any more, but the high quality of service, strong telecommunications infrastructure, the ability of local talent to service and adapt to all markets, excellent leadership from the industry constituents, and FUN culture that working in the Phils entails. Now BPOs are the bedrock upon which the office market stands, while the POGOs are facing their own concerns over their future here, albeit for different reasons. However, when there is so much vested interest from both the public and private sectors in the industry, it’s very difficult to see POGOs leaving anytime soon. While developers still cap their POGO exposure to 15% of their total portfolio, I can see this ratio increasing. The number one influence that I accredit to BPOs that trickles down through a vast array of industries, is the positive perception that they have brought to the Philippines. By their longstanding presence and continuous expansions across the country, it reflects a country that is generally safe, well organized at the PEZA & DTI levels, offers a hospitable culture, and again, has good leadership amongst the pioneers.
- Being in the service industry, BPOs should continue weathering any storm from increased trade barriers very well, while manufacturing supply chains will be pressured to onshore. Credit card, financial research, data encoding, and other customer service work will still be handled remotely, and thus the market is well-positioned over the long term.
- Most small, non-basic businesses that support the larger tenants like coffee shops, restaurants, gyms, convenience stores, etc. will require assistance from their respective landlords in order to survive. If they don‘t survive, don’t expect to find a replacement tenant in the near future.
- The difficulty in commuting to the business districts and the social distancing requirements will encourage BPOs (and other firms whose employees can sufficiently service clients from home) to continue to offer some work from home arrangements. Invariably, however, it’s impossible from both tangible (ex. lack of reliable hardware/infrastructure at home) and intangible (ex. team camaraderie and fun) reasons to replicate the office environment. The WFH transition has been in effect for years in other markets, and it will certainly continue getting traction in the Philippines as new infrastructure comes in.
- Another trend that has been occurring for a couple of years now that will be accelerated is the dispersion of employees. Dispersion increases the quality of life and safety/security of employees while reducing overhead for employers. Areas like Metro Cavite, Laguna, Batangas, Clark, Cebu, Iloilo, and Davao are cities that could benefit from this trend in terms of job creation, ancillary products & services, and increased property values.
- Serviced office and managed facility operators may be down for the short term but they are definitely not out. Along with their clients, they have been a strong demand driver in the market. While there will be some consolidation in the face of stagnant demand in the short to medium term as well as new supply in the form of new owner-operators as some BPOs downsize and landlords offer fully fitted space for lease, the uncertainties of the global economy will disable companies from committing to long term contracts with capex heavy fit-outs.
- The occupational density of office tenants (traditional & BPOs) will be analyzed in order to create safe distancing practices. Five square meters per person, which is the maximum density permitted by PEZA, may or may not be sufficient, depending on the furniture layout.
In general, capital intensive businesses like manufacturing, oil exploration and production, and mining with weak balance sheets are poorly positioned to weather the current environment. However, the BPO sector is to a certain extent a play on technology. The Amazon’s, Microsoft’s, and Salesforce.com’s of the world seem well-positioned.
Lastly, the large real estate developers in the Philippines are not nearly as levered as their counterparts in other parts of the world. Having gone through the Asian financial crisis, most have strong balance sheets and maybe opportunistic in acquiring and developing more space once there is clarity on the length and extent of the current crisis.
TFA will be sharing a handy analytical tool to compare cash flows under various lease scenarios so please stay tuned for that. It’s very useful in deciding which lease option is best for your business. Aside from leasing and sales of commercial property, TFA is ready to consult you on leasing requirements, subleasing/assignments, rent reviews, or lease renegotiations.
If you have any questions or comments, please fire away. I would also be happy to give you a call to discuss the market in greater detail. Please follow Tan, Frankum & Associates (TFA) on Linkedin and FB.