The spirit of entrepreneurship is growing stronger in the Philippines, with over 900,000 MSMEs recorded in 2017. With more and more businesses popping up, demand for suitable office spaces has never been higher.

The question of where to establish one’s headquarters is often top of mind for entrepreneurs. And rightly so, as setting up an office is more than just renting a vacant spot. Much like choosing a home, it’s a decision that is influenced by various internal and external factors.

In their annual report, real estate services company Pronove Tai International Property Consultants revealed how the office market fared in 2018 and what to expect in the new year.

Highs and lows for 2018

In terms of office stock, or accumulated completed buildings recorded from 1967 to Q4 2018, Makati remained the largest office district with 3.4 million square meters of office space. Taguig and Ortigas Center followed with 2.2 million square meters and 1.7 million square meters, respectively.

However, Taguig took the lead in terms of office supply, or annual completed supply of space. 280,000 square meters were constructed in 2018, followed by Makati with 121,000 square meters and Quezon City with 118,000 square meters.

However, more office supply doesn’t necessarily translate to more vacancies. Despite having the lowest office supply among the three districts, Quezon City recorded the highest vacancy rate at 13%. Mandaluyong’s 10% vacancy rate increased by 2% from 2017, while Taguig maintained its 7% rate.

Meanwhile, vacancy rates in Muntinlupa, Ortigas Center, Makati, and Bay Area slipped in 2018, dipping below the healthy 5% vacancy rate. Bay Area in particular is essentially at full capacity, hitting a tight 0.4%.

Different drivers, different needs

Different industries have different specialized needs that they need their office locations to satisfy.

Quezon City’s bad traffic and lack of competitive infrastructure projects repelled potential tenants who were looking for locations that were accessible and boasted complete amenities. The city’s average rent, which was significantly lower than other districts, wasn’t enough to convince businesses to set up shop in the area. Grade A buildings in Quezon City cost P850 per square meter per month to rent, much cheaper than Makati’s P1,570 or Taguig’s P1,310 for buildings of the same grade.

On the flip side, Bay Area and Makati’s issuance of Letters of No Objection (LONO) to Philippine offshore gaming operators (POGOs) drove up the demand for spaces under this sector. Their employees’ familiarity with the districts was also a consideration for POGOs. “Given that these are mostly foreign workers, they’re not as familiar just yet with Quezon City as compared to the two other districts [which issued LONOs],” said Monique Pronove, CEO of Pronove Tai.

Further growth for 2019

Overall, the office market is expected to grow in 2019, with office stock projected to hit 11.7 million square meters, with 1.04 million square meters coming from new office supply. Quezon City is expected to be the fastest-growing district with a 31% year-on-year growth rate. “We will be seeing competitive pricing within this area,” Pronove reported. “The top developers [SM, Eton, Robinsons, Ayala, and Araneta] are represented there with developments that will be completed in 2019.”

POGOs are also expected to increase their demand for space. The industry has already taken up 45% of pre-leased transactions for 2019, surpassing IT and business process management firms (IT-BPM) and traditional firms at 36% and 19%, respectively. Pronove expects these firms will also be expanding to different districts like Mandaluyong and Taguig, as well as cities like Clark, Davao, and Cebu.

To help support these developments, the government is called to fast-track proclamations of economic zones, vital for industries like IT-BPM when choosing their locations. In 2018, approval time for economic zone applications took up to 14 months, too slow to fully actualize the growth potential in the sector.

For landlords, Pronove Tai encourages them to acquire tenants from different sectors. “We always say that landlords should diversify their tenancy mix and should not be focused on just one demand driver,” said Pronove.