THE logistics sector continues to be resilient despite the slow recovery of the rest of the real estate market, according to JLL Philippines. The firm foresees subdued property market activity in the remainder of 2021, with the coronavirus disease 2019 (Covid-19) vaccine rollout heavily impacting most real estate decisions across all sectors.

Office buildings near the SM Mall of Asia in Pasay City. JLL Philippines sees increasing
vacancies in office space unless the vaccine rollout can be accelerated to restore confidence.

In its quarterly market overview event, JLL Philippines shared that the office, residential, retail and hospitality sectors in Metro Manila, as well as the logistics sector in the Greater Manila Area, are lagging in terms of both demand and supply, which caused rentals to dip.

Office and residential vacancies continue to climb

The first quarter of 2021 saw no new office space supply. Despite the lack of new supply, overall vacancy breached double-digit territory at 14.7 percent due to continuous move outs, pre-terminations, downsizing, and softening of demand, particularly among Philippine offshore gaming operators (POGOs) and outsourcing and offshoring (O&O) firms.

According to Janlo de los Reyes, JLL Philippines’ head of Research and Consultancy, “Office space lease demand was mainly driven by short-term renewals from O&Os and traditional occupiers to give them flexibility to adapt to the ever-changing environment.”

He said that rentals have dropped as a result of these move outs, particularly among expatriates. As a result, landlords that have higher vacancy in their developments lowered rents to draw in new clients. Headline rents in select buildings that may have prolonged elevated vacancy due to soft leasing market may further lower rents.

“The luxury segment, which is highly reliant on corporate housing and expatriate demand, experienced the highest vacancy across segments” he added.

He further said that this is evident in the higher vacancy of condominiums located within central business districts as they face weak leasing activity from corporates and professionals affected by the pandemic.

Retail and hospitality highly reliant on vaccine rollout

The retail sector did not record new supply in the first quarter of 2021. Despite this, shopping mall vacancy in Metro Manila surged to 6.6 percent as store closures outnumber store openings done prior to the re-implementation of enhanced community quarantine in March.

Similarly, there was no new supply in the hospitality sector and occupancy levels remained low at 20.9 percent in the same period due to limited travel.

“The sector is mainly buoyed by repatriated overseas Filipinos. We anticipate hospitality demand to remain subdued until end of the year,” said de los Reyes.

He added that these sectors may continue to lag behind in the coming months. But this will depend on the speed of the Covid-19 vaccine rollout. If the rollout can be accelerated, it can create a positive impact on the two aforementioned sectors.

Logistics still a bright spot; demand to spill over to office sector

“As we have forecasted in our report, ‘The Evolution of Philippine Logistics: A Case for Better Quality Logistics’, the logistics sector still sees growth even until next year as we see more developers and operators moving into this market,” said de los Reyes.

The sector saw around 45,800 square meters completed in the first quarter in Cavite and Laguna provinces, pushing the total supply to 1.6 million square meters. More supply is expected in the coming years as more developers and operators are eyeing this particular asset class for growth.

De los Reyes also explained that the sector is driving demand not only in the industrial sector but also in the office sector. As more e-commerce and retail players are stepping up and take up logistics space, they also require office space to sustain their business and operations.

Overall, JLL Philippines anticipates subdued market activity in the next quarters and uneven recovery in demand.

“Occupiers and investors are hesitant to pull the trigger regarding their return to office or expansion activities due to the highly fluid environment. Employee safety and wellness, as well as cost optimization, remain their top priorities. Key to all these concerns is the vaccine rollout which will impact a lot of corporate decisions across all sectors,” concluded de los Reyes.