Quarterly Review

PHILIPPINES | OFFICE
3Q 2016
10 NOVEMBER 2016

The delivery of office buildings is hindered by construction

Sustained demand delays brought about by the tight labor situation.
Construction delays have plagued other property sectors

and construction such as residential, leisure, and retail. Colliers encourages

developers to firm up training partnerships with the
governments skills development agency to tap available
delays define office labor supply from the countryside.

segment in 3Q Forecast New Supply, Major CBDs

(NUA, in sq m)
Joey Roi Bondoc
Research Manager | Philippines Year Makati CBD Fort Bonifacio
Ortigas
Center
As of 2015 2,853,034 1,170,503 1,380,282
The demand for office space in central business districts 2016F 13,250 177,845 14,503
as well as emerging hubs is primarily sustained by the
2017F 16,465 385,695 60,617
Information Technology-Business Process Management
2018F 41,326 173,114 45,673
(IT-BPM) sector. Colliers has observed strong pre-
leasing among buildings slated for completion in the 2019F 50,362 250,401 -

fourth quarter of the year and 2017. We encourage 2020F 183,453 29,634 278,445
developers to lock in early to secure competitive rates. Total 3,157,891 2,187,192 1,779,520

Source: Colliers International Philippines Research

Forecast at a glance
Demand
Office space demand remains robust as it is
driven by the IT-BPM sector. Demand is projected
to gravitate towards the fringe areas due to
scarcity of developable land and increasing rents
in major business districts.
Supply
The completion of new office supply is hindered
by project delays brought about by tight labor
situation in the construction sector.
Over the next 12 months, Colliers sees the demand for
office space being defined by strong pre-leasing
activities, continuous growth of shared service firms,
subdued outlook on the Information Technology-
Business Process Management (IT-BPM) sector, rise of
alternative BPO locations, adoption of robotics and
automation, and a wait-and-see attitude among investors
amid a more politically-charged environment.

Vacancy rate
Overall vacancies will drop further in Makati and
Ortigas Center due to sustained demand.
Vacancies in Fort Bonifacio declined due to strong
take up from KPO firms.

Rent
Rates will continue to moderately rise as large
new supply is tempered by strong pre-
commitments.
Fort Bonifacio accounts for bulk of Makati CBD vs. Metro Manila Office Stock

new supply 16M 12%

14M 10%
Around 86,000 sq m of new office space went online in 12M

NUA (sq m)
8%
the third quarter of the year, bringing Metro Manilas stock 10M
to about 7.8 million sq m as of end-September. 8M 6%
6M 4%
Fort Bonifacio contributed nearly 53,000 sq m of new 4M
2M 2%
office space with the completion of Citibank Plaza and
M 0%
Five West Campus. The other buildings completed during

2012
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

2013
2014
2015
2016F
2017F
2018F
2019F
2020F
the quarter were One Felicity Center in Quezon City and
Scape in the Manila Bay Area. No new office space was
Makati CBD Stock (LHS) Metro Manila Stock (LHS)
delivered in Makati and Ortigas CBDs.
Total Stock YoY Change (RHS)

Six buildings are expected to further add 110,000 sq m to

Metro Manilas office stock before the end of the year. Source: Colliers International Philippines Research
These are Ore Central and Vista Hub in Fort Bonifacio;
Panorama in North EDSA Triangle; and Biopolis and Makati vacancy dips further
Filinvest Pasay Cyberzone Towers 1 and 2 in the Manila Makati CBDs overall vacancy declined further to 0.84%
Bay Reclamation Area. Nearly 40% of the new supply will reflecting the dearth of available space in this market.
be in Fort Bonifacio while the rest will come from the Vacancies in premium buildings rose slightly to 0.8%
emerging business hubs, North EDSA Triangle and from 0.5% following the increase in vacancies in the
Manila Bay Area. Enterprise Center. However, this was offset by lower
vacancies in Grade A and Grade B office buildings.
Construction delays curtail supply Strong take up was recorded in Petron Megaplaza,
The amount of office space that will be delivered by the Alphaland Makati Tower and 88 Corporate Center.
end of the year will be lower than initial projections. At the Forecast New Supply, Major CBDs
beginning of 2016, the projected supply of new office
(NUA, in sq m)
space announced by developers was about 640,000 sq
m. This has been scaled back to about three-fourths of GRADE 2Q 2016 3Q 2016 3Q 2017F
the original projection to about 500,000 sq m due to Premium 0.46 0.84 0.68
project delays related to the tight labor supply in the Grade A 3.71 1.57 1.28
construction sector.
Grade B & Below 1.25 0.62 0.59
Construction delays have plagued other property sectors All Grades 1.65 0.84 0.74
such as residential, leisure, and retail.
Source: Colliers International Philippines Research

Forecast New Office Supply (NUA, in sq m)

LOCATION AS OF 2015 2016F 2017F 2018F 2019F 2020F TOTAL
Makati CBD 2,853,034 13,250 16,465 41,326 50,362 183,453 3,157,891
Ortigas Center 1,380,282 14,503 60,617 45,673 - 278,445 1,779,520
Fort Bonifacio 1,170,503 177,845 385,695 173,114 250,401 29,634 2,187,192
C-5 Corridor* 350,271 - 24,575 81,045 73,191 - 529,082
Alabang 389,701 35,562 86,658 - 58,277 35,010 605,207
Mandaluyong 284,550 - 53,473 70,943 72,900 - 481,866
North EDSA Triangle QC 256,900 49,056 37,106 71,872 68,010 39,894 522,838
Araneta Center 84,955 49,504 - - 57,564 - 192,023
Manila Bay Reclamation Area 257,422 61,536 73,755 142,351 123,452 105,572 764,089
Other locations** 476,746 49,130 79,624 130,430 127,808 168,088 1,031,827
Total 7,504,365 450,385 817,968 756,754 881,965 840,096 11,251,533

*Eastwood City and C-5 Pasig

**Manila, Pasay, Quezon City, and other fringe locations
Source: Colliers International Philippines Research

2 Quarterly Review | 10 November 2016 | Philippines | Office | Colliers International

Overall vacancy in Makati CBD has been on a decline
since December 2015 due to a sustained demand from
BPO and non-BPO locators coupled with the limited new
supply. No new buildings will come online until 2018 with
the expected completion of four new office buildings
including CityGate HQ office along Ayala Avenue. The
renovated Insular Life will be launched by the third quarter
of 2017. As such, demand for office space in Makati will
remain strong and we see overall vacancy staying at sub
1% in the next 12 months.
Makati CBD Office Supply and Demand
200K
150K
NUA (sq m)
Non-BPOs fuel Ortigas demand
Ortigas Center continued to register healthy occupancy
with vacancies down to 0.71% from 1.72% in 2Q2016.
Vacancies across all segments declined with Grade B
vacancy substantially easing to 1.1% from 2.5% in the
previous quarter. Most of Ortigas Center locators are
traditional, non-BPO companies. Supply in Ortigas
Center will remain tight at least over the next 12 months.
The continued demand for space, coupled with limited
supply, should push vacancies downward. Colliers
projects vacancies in this business district to remain at
20% sub 1% over the next 12 months.
18%
16%
Strong pre-leasing drives rental

100K 14%
12%
50K 10% growth
8%
K 6%
4% Colliers sees rents in established business districts
-50K
2% increasing between 6% to 10% over the next 12 months
-100K 0% despite the expected completion of a significant amount
2003
2004

2016F
2017F
2001
2002

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

of office space. This is due to the strong take-up from

New Supply During Year (LHS) Take-up During Year (LHS)
Vacancy at Year-End (RHS)
Source: Colliers International Philippines Research
Fort Bonifacio as KPO hub
Office vacancy in Fort Bonifacio has been declining since
March 2016. For the third quarter of the year, vacancies
dropped anew to 1.5%. This is attributed to strong take up
among Grade A buildings such as Net-1 Center, Net
Square, and SM Aura. Vacancies among Grade A offices
declined to 0.61% from 1.44%, more than offsetting the
rise in vacancies in Grade B buildings. Despite its
relatively high lease rates, Fort Bonifacio remains the
primary choice of shared services firms such as Google,
Citibank, Towers Watson, and Thomson Reuters; and
global banking firms like JP Morgan and Deutsche Bank.
Fort Bonifacio has firmly established itself as the countrys
major hub for companies that provide higher value
outsourcing services such as software engineering, health
information management and finance and accounting.
Colliers expects overall vacancy in Fort Bonifacio to hover
between 1.5% to 2% in the next 12 months due to
sustained demand from KPO firms and strong pre-leasing
among buildings set to be completed in 2017.
BPO as well as non-BPO companies. The amount of
office space expected to go online is tempered by strong
pre-leasing in buildings set for completion in 4Q2016 and
2017.
Given the limited supply and stable demand, the average
rental rate for premium buildings in Makati CBD rose 1%
QoQ to PHP1,306. Grade A office rents grew faster to
PHP933 per sq m, up 1.5% from 0.5% rise in 2Q2016.
Colliers expects rents in Makati CBD to further expand by
6% to 8% over the next 12 months.
Rental rates in Fort Bonifacio continue to rise on the back
of strong demand. Grade A office rents reached PHP908
per sq m while Grade B office rental rates averaged
PHP794. Rental rates in Fort Bonifacio grew by an
average of 1.3% QoQ. Barring construction delays, an
estimated 43,000 sq m of new office net useable area
(NUA) is projected to be completed in Fort Bonifacio
before the end of the year while about 386,000 sq m is
expected to be delivered in 2017. Despite the significant
amount of new office space, Colliers projects rental rates
in the business district to increase by 4% to 7% over the
next 12 months. The supply is tempered by strong pre-
leasing with an estimated 80% of the new office space to

Comparative Office Rental Rates (PHP / sq m / month)

Makati CBD (based on NUA)
GRADE 2Q 2016 3Q 2016 % CHANGE (QoQ) 3Q 2017F % CHANGE (YoY)
Premium 1,130 - 1,440 1,200 - 1,500 1.04 1,240 - 1,580 8.37
Grade A 720 - 1,110 700 1,300 1.48 780 - 1,190 6.07
Grade B 590 - 840 610 - 860 2.01 650 - 920 7.39

Source: Colliers International Philippines Research

3 Quarterly Review | 10 November 2016 | Philippines | Office | Colliers International

be delivered by 4Q2016 already pre-committed and nearly Grade A capital values in Fort Bonifacio rose 2.1% to
half of additional space set to be completed in 2017 PHP135,986 while Grade B values grew 2.3% to
already pre-leased. PHP89,191.

In Ortigas Center, rental rates in Grade A buildings rose
1.1% QoQ to PHP674 per sq m. Grade B rates averaged
PHP596 per sq m, growing 2% QoQ. Colliers expects
rental rates in Ortigas Center to further rise by 4% to 6%
over the next 12 months. No new supply is expected in
Ortigas until 3Q2017 with the projected completion of 30th
Corporate Center and IBP Tower. Both buildings will add
a combined 74,000 sq m of NUA to Ortigas Centers office
stock.
Colliers expects capital values in Makati CBD and Fort
Bonifacio to rise by 13%-16% and 11%-14%,
respectively, in the next 12 months. We see further yield
compression given that both land and office space capital
values in the established business hubs are growing at a
faster pace than rental rates. This compels firms to ramp
up office developments in existing hubs such as Manila
Bay Reclamation Area, North EDSA Triangle, and Arca
South.
Makati CBD Office Capital Values

250K
Shift to fringe

PHP / sq m / month
200K
Rental escalation in established business districts is
150K
compelling cost-sensitive outsourcing firms to look for
office accommodation in alternative locations that offer 100K
more competitive rents. Colliers sees more BPO
50K
companies gravitating towards emerging hubs such as the
Manila Bay Reclamation Area, North EDSA Triangle, and K

1Q16
2Q16
3Q16
2004
2001
2002
2003

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

4Q16F
1Q17F
2Q17F
3Q17F
Makati fringe. Developers are encouraged by the
expected surge in demand from the outsourcing industry
as they ramp up office space construction in these
Premium Grade A Grade B/B-
emerging locations. Colliers is forecasting an estimated
490,000 sq m of new office NUA in the Manila Bay
Source: Colliers International Philippines Research
Reclamation Area over the next four years, representing
close to a fifth of the total office space expected to be
completed in Metro Manila during the period.

Capital value outpaces rental

growth, pushing developers toward
fringes
Capital value growth continued to outpace rental growth in
the established CBDs. Premium office space in Makati
CBD averaged PHP183,066 per sq m, a 2.2% growth
QoQ. Grade A office values reached PHP121,897 per sq
m, up 2.9% QoQ while Grade B capital values accelerated
the fastest at 3.3% QoQ.

Comparative Office Capital Values (PHP / sq m / month)

Makati CBD (based on NUA)
GRADE 2Q 2016 3Q 2016 % CHANGE (QoQ) 3Q 2017F % CHANGE (YoY)
Premium 165,480 - 192,840 169,090 - 197,040 2.18 182,920 - 213,160 8.18
Grade A 97,600 - 139,290 100,440 - 143,350 2.91 108,660 - 155,090 8.19
Grade B 70,900 - 103,250 73,260 - 106,680 3.32 77,400 - 112,720 5.66

Source: Colliers International Philippines Research

4 Quarterly Review | 10 November 2016 | Philippines | Office | Colliers International


Over the next 12 months, Colliers
sees the demand for office space
being defined by the following:
Strong pre-leasing activity. More than 60% of
office space due by the end of the year has been
pre-leased while about a third of buildings set for
completion in 2017 have already been pre-
committed. Colliers encourages occupiers to lock
in early to get competitive rates. Pre-leasing
activities enable developers to plan on future
projects as buildings under construction are
already significantly leased-out. A strong pre-
leasing trend also ensures that demand will
remain robust in the short term, so developers
wont have to worry much about declining rental
rates at least for the next 12 to 18 months.
Continuous growth of shared service firms.
Firms such as Google, Uber, Dell, VISA, and
Thomson Reuters have recently acquired space
in key business districts and there are reports of
planned additional take-up. Developers should
plan space with flexible floor plates to enable
occupiers to conveniently expand operations.
Rise of alternative locations. The North EDSA
Triangle, Arca South, and Manila Bay
Reclamation Area are emerging alternatives to
established CBDs such as Makati, Ortigas, and
Fort Bonifacio. Both BPO and KPO firms are
expanding in these areas because of competitive
rents and larger floor plates offered by
developers. The development of the fringe areas
is crucial for the continuous growth of the Metro
Manila office market. The Philippines can learn
from the Indian model where Bengaluru, Chennai,
Hyderabad, Kolakata, Pune and Noida developed
outside of Delhi NCR and Mumbai. Colliers
recommends that developers continue to acquire
land in the fringe areas given the expected influx
of more outsourcing investments. They should
also consider building transit-oriented
developments following the governments
announcement of implementing key transport
projects around these emerging CBDS (see
Colliers Radar entitled Planes, Trains, and
Automobiles: Impact of the Governments
Infrastructure Policy on the Real Estate).
Subdued outlook on the information
Technology-Business Process Management
(IT-BPM) sector. Based on its latest roadmap,
IBPAP expects the local outsourcing sector to
generate USD38.9 billion in revenues and employ
1.8 million full time employees (FTEs) by 2022.
The targets were based on the projected USD22
5 Quarterly Review | 10 November 2016 | Philippines | Office | Colliers International
billion in revenues and 1.15 million workers that
will be hired by the sector this year. However,
these figures are lower than the USD25 billion in
revenues and 1.3 million jobs targeted for 2016
under the previous road map. A shift in the
percentage of employees in higher skilled roles
was also noted, revealing the IBPAPs push to
prioritize higher value, KPO-related activities.
Low-skilled full time employees (FTEs) were
projected to drop from 43% of all employees in
2015 to 25% in 2022; while Mid- and High-skilled
FTEs were expected to rise from 58% in 2015 to
75% in 2022. With this shift, developers should
assess the needs of KPO-oriented tenants,
which are different from the requirements of call
centers and other BPO-type occupiers.
Robotics and automation. One of the major
factors behind the IBPAPs lower growth
forecasts for IT/BPM employees is the
emergence of automation. New technologies
have emerged in which robotics and algorithms,
with the concern that they could replace low-skill
level BPO employees, such as encoding and
voice. While these concerns are well-founded,
less than 5% of shared services companies
believe that the implementation of automation
would result in a reduction of manpower. Instead,
it is seen that the application of automation
would make their employees more efficient. With
these developments, we would like to highlight
that occupiers should embrace robotics as an
enabler of todays business growth, instead of
viewing them as a threat (see Colliers Insights
whitepaper entitled Nots and Bots: Unboxing the
Truth About Robotics Impact). Their labor pool
can be trained to perform more complicated roles
while software applications take on the simpler,
time-consuming tasks. For developers, we
recommend that they build a diversified portfolio
of buildings located not only in primary business
districts but also in alternative locations where
rents are more appealing to new entrants.
 A wait-and-see attitude amid a more politically
charged environment. Recent statements by
President Duterte against the United States and
its economic interests in the country have shaken
American businesses operating locally. The
IBPAP has sought to hold dialogue with the
President in order to clear up any changes in local
policies concerning the BPO industry. In general,
Colliers has not seen any significant changes in
its clients plans to expand their operations in the
country, but some BPO companies have decided
to take a wait-and-see attitude and have
lengthened their due diligence process.
Nevertheless, the fundamental strengths of the
Philippines as a viable location for BPO and KPO
operations remain, and a weakening peso makes
it more attractive to locate here.

For more information: Contributors:

Julius Guevara Joey Roi Bondoc Randolf Ilawan Richard Raymundo
Director Research Manager Research Assistant Deputy Managing Director
Valuation & Advisory Philippines Philippines Philippines
+632 858 9050 +632 858 9057 +632 858 9068 +632 858 9028
julius.guevara@colliers.com joey.bondoc@colliers.com randolf.ilawan@colliers.com richard.raymundo@colliers.com

Copyright 2016 Colliers International.

The information contained herein has been obtained from
sources deemed reliable. While every reasonable effort has
been made to ensure its accuracy, we cannot guarantee it.
No responsibility is assumed for any inaccuracies. Readers
are encouraged to consult their professional advisors prior to
acting on any of the material contained in this report.