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Commercial Real Estate: Impacts of the Pandemic and the ‘New Normal’

Updated: Apr 9, 2021

The effects of the COVID-19 pandemic reach far and wide throughout the globe, not discriminating with any demographic. It has affected individuals, local and multinational companies and nations as a whole, paralyzing national economies as a result.

Being thrown in this situation heavily under-prepared has caused a lot of uncertainty for everyone. And while the initial steps have been taken as to not aggravate the situation any further, we must also prepare ourselves on how the world will move forward.

In this article, we will zoom in on the Philippines' real estate market, the commercial sector in particular, as to what the effects of the pandemic are and how it will shape the market moving forward.

First, we have to take a look at one of the most basic main drivers of any market, Supply and Demand. The office supply comes from several developers in the country, and with all building construction currently at a standstill, building completion dates and handover will unfortunately be delayed. Once this resumes, capacity will still not be the same as new policies and guidelines that adhere to social distancing will have to be observed by contractors to keep its employees safe and healthy to prevent further transmission or infection of the virus. This means that the projected growth in total office supply will have a significant decrease.

Now if we take a look at the demand, there is no evident movement here either as office buildings are on a complete lockdown, making site visits and meetings for new potential occupiers impossible. In the most recent years, demand has been driven by Philippine Offshore Gaming Operators (POGO), Business Processing Operators (BPO) and traditional occupiers. These industries' expansion plans are also heavily affected by the pandemic, particularly the BPO sector. The International Monetary Fund (IMF) has already declared that we are in a global recession and this reflects directly to outsourcing companies halting their expansion plans and employing a wait-and-see approach. For POGO companies however, a different deterrent is at hand. A bill dubbed 'Anti-POGO Act of 2020' has just been filed by several Philippine lawmakers on May 6, 2020 which proposes that operations of POGOs in the country shall be banned and declared illegal. If this bill gets passed and approved, a sizable amount of office stock will free-up in almost all CBDs in Metro Manila.

Office supply will have an estimated delay in growth for two to three quarters while demand will be affected more significantly because of additional factors outside those brought about by the pandemic. This will cause an upward shift in vacancy rates which in turn will cause Philippine's Commercial Sector to enter a Tenant's Market. This means that the tenants will have the leverage over negotiations with its lessors; which might provide its tenants with more incentives than it usually gives such as longer rent-free periods, reduced rental rates, and increased flexibility in other lease terms.

But as most things are cyclical, we know that once again, we'll rise above this eventually. But the big question is, how long will this last? As this is an economic crisis of a global magnitude, the closest thing that we can use as a basis is the 2008 Global Financial Crisis (GFC). Zooming in on how the Philippines' commercial property sector picked up again after the GFC, it took at least 9 months before we started seeing BPOs starting expansions again. However, analysts, experts, global organizations and institutions including the IMF believe that this global recession is far worse than the 2008 GFC and is projecting economic activity to still be below pre-outbreak levels in 2021. With these things in consideration we can assume that the remainder of 2020 will be every nation trying to reset and rebuild its own economies. Ideally, we should start to see a slow resurgence in the office market in 2021.

As a recommendation, companies who had expansion plans pre-COVID19 should explore the CBDs of Metro Manila once again at the earliest signs of an economic bounce-back and check for adjusted rental rates and added incentives. For those with requirements now or in the foreseeable future, we encourage a careful strategic planning as early as possible to give allowance in time for any necessary plan adjustments. COVID-19 impacts can possibly help occupiers negotiate their leases but obviously can also affect operations especially if you choose a high risk building when it comes to employees' safety. Contact one of our consultants to help you mitigate risks and to assist you with your real estate planning overall. Send us your inquiries or better book a meeting online with one of our consultants ---



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