COLLIERS ANNUAL OFFICE | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020 CEBU CITY A HUB FOR BUSINESS CONTINUITY Joey Roi Bondoc Developers respond to office demand recovery as occupants decentralize and firm up business continuity plans Senior Manager | Research | Philippines +63 2 8858 9057 [email protected] Insights & 2020–22 Recommendations H1 2020 Full Year 2020 Annual Average While we see a slower pace of > Colliers sees softer absorption in 2020 as leasing across the country in companies wait-and see due to the pandemic and lockdown. Colliers and the 2020, Colliers believes that Metro 2 Demand government project a recovery once market 26,900 sqm 55,000 sq m 119,300 sq m Cebu will likely be among the first conditions improve starting Q1 2021. locations to recover as it remains a preferred destination outside Metro Manila. > Completions in 2020 will likely slow due to construction delays. We see delivery picking Colliers recommends that up from 2021 to 2022 as developers respond developers tap our and Supply to a rebound in take-up and space delayed in 0 sqm 68,300 sq m 133,500 sq m government-projected recovery 2020 is completed during the period. in 2021 by: > Highlighting the availability of Annual Average HOH/ YOY / 1 Growth 2019–22 / PEZA and healthy spaces End H1 End 2020 End 2022 > Stressing property > In 2020, Colliers sees rents declining due to -0.4% -8.0% -0.7% management capabilities softer demand. We see rents recovering in amid the pandemic 2021 as leasing activity picks up and occupiers Meanwhile, occupants should: Rent respond to national and global recovery. PHP631 PHP583 PHP619 > Explore available space within integrated communities > We see vacancy rising in 2020 but this should -2.3pp +0.4pp -0.1pp > Consider Metro Cebu’s be tempered by muted office completions. advantages over other sites The recovery in absorption starting 2021 including global Vacancy should result in lower vacancy. 9.3% 12.0% 11.3% competitiveness, availability Source: Colliers International. Note: 1 sq m = 10.76 sq ft. USD1 to PHP51 as of the end of Q1 2020. 1Philippine Economic Zone Authority (PEZA) proclaimed spaces of manpower, and access. where locators enjoy tax and non-tax incentives. 2Economic recovery to start in 4th quarter, Diokno says. Traditional includes companies in various sectors such as legal, engineering and construction, government agencies and flexible workspace operators. COLLIERS ANNUAL OFFICE | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020 RECOMMENDATIONS Highlight property management … Similar to what we see in Metro Manila, occupiers are now placing a Cebu as part of outsourcing firms’ business continuity plans (BCP) premium on the safety and quality of office spaces. The need to provide more office space per employee is likely to party drive demand over the next Colliers sees Metro Manila-based outsourcing companies aggressively 12 months. But aside from allocating larger spaces, Colliers believes that looking at diversifying their office footprint and establishing operations occupants are likely to prioritize sanitation, emergency preparedness, and outside Metro Manila. In our opinion, landlords in Cebu should design considerations (e.g. air circulation and glass ratio for natural sunlight). comprehensively assess the space requirements of outsourcing occupants planning to open shop or expand in Cebu city. In our opinion, spaces within …and safety of office space the Cebu IT and Business Park as well as their fringes are among the more attractive options due to availability of PEZA space. Colliers believes that the pandemic has only raised occupants’ demand for green and health office spaces. Firms need to look after the safety of Highlight availability of PEZA space employees and should consider allotting more space per employee and providing increased natural light. In our opinion, now is an opportune time One major reason why outsourcing firms continue to keep Cebu in their for developers to highlight their green5 and LEED-certified6 office spaces. investment radars is the availability of PEZA-proclaimed3 office space in Metro Cebu. About 111,000 sqmetres (1.2 million sqfeet) of new space due Occupy space within integrated communities from 2020 to 2022 is PEZA-proclaimed. Colliers sees the granting of PEZA proclamation to Abiathar Commercial Complex in Cebu, which covers One Colliers sees the demand for office space within business parks and their Montage building, further raising PEZA availability within Cebu Business Park peripheral areas rising especially when we believe market sentiment starts fringe in the next few years, which should benefit outsourcing occupiers. recovering in early 2021. Colliers expects Cebu IT Park and Cebu Business Park and their fringes to account for 77% of new supply from 2020 to 2022. Highlight Cebu’s advantage over other locations Cebu office supply, demand and vacancy, 2016-2022F Colliers believes that Cebu remains a preferred business destination outside Metro Manila due to its competitiveness in terms of manpower, Supply Net Take Up Vacancy Rate infrastructure, and cost of doing business. In Tholons’ 2019 survey of the 100 most attractive outsourcing sites in the world, Cebu ranked 12 4. Among 200,000 14.0% 12.3% 12.0% 12.0% Tholons’ criteria are talent, infrastructure, and innovation. 11.4% 11.6% 11.7% 11.3% 150,000 10.0% Assess ESLs’ office space requirements 8.0% 100,000 Colliers sees demand from online English as a Second Language (ESL) 6.7% 6.0% companies growing as a result of the COVID-19 pandemic. With global travel 4.0% restrictions, students from China, Japan and South Korea are likely to shift to 50,000 2.0% online education instead of undergoing an intensive physical classroom education in Cebu. We see this potentially increasing the office space - 0.0% requirements of ESL centres operating within Cebu IT and Cebu Business 2016 2017 2018 2019 2020F 2021F 2022F Parks. Colliers encourages developers to assess the office space Source: Colliers International. Note: 3Philippine Economic Zone Authority (PEZA) proclaimed spaces where requirements of these firms and be more proactive in responding to their locators enjoy tax and non-tax incentives. 4Tholons, Tholons Services Globalization Index, 2019. 5According to the World Green Building Council, a Green building reduces or eliminates negative impacts on our climate and office requirements. natural environment. 6LEED = Leadership in Energy and Environmental Design. 2 COLLIERS ANNUAL OFFICE | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020 Among the major outsourcing deals recorded in 2019 are Tech Mahindra, NEW SUPPLY TO DROP BY 50% Accenture, 24/7 In Touch and Google. In 2019, Metro Cebu’s office stock reached 1.17 million sq metres (12.5 Previously, the Department of Labor and Employment noted that the million sq feet), from 1.04 million sq metres (11.1 million sq feet) in 2018. A outsourcing sector keeps providing jobs amid the pandemic. The agency said combined 43% of the new supply in 2019 was completed in the Cebu IT and that new outsourcing jobs are likely to go to Cebu, among other locations8. Business Parks. These expansions should temper Cebu’s office vacancy, which we see Due to construction delays brought about by the pandemic and lockdown, dropping to 11.7% in 2021 from 12% in 2020. Colliers sees traditional and Colliers sees muted office completion in 2020. From our original projection outsourcing firms dominating office space take-up in 2020. of 129,000 sq metres (1.4 million sq feet), we see completion plummeting to Breakdown of Cebu office transactions, Q1 2020 only 68,300 sq metres (734,900 sq feet). New supply (sq m) and % of total new supply, 2020 to 2021 9% 26K | 10% 70K | 27% Orion Corporate Center Traditional Central Bloc 2 Skyrise 3B BPO Mabuhay Tower 2 22K | 9% 28% Mandaue Faustina Center 30K | 12% KPO Filinvest Cebu Cyberzone Cebu IT Park 62% F. Cabahug 49K | 19% Tower 3 CITP Fringe 1 Nito Tower Cebu Exchange (Phase 1) CBP Fringe JEG Tower 36K | 14% Cebu Business Park Johndorf Tower 24K | 9% Reclamation Area Grand Tower Cebu Latitude Corporate Center Condo Office Source: Colliers International Source: Colliers International. Scale: 1cm = 1km. RENTS TO RECOVER IN 2021 VACANCY TO DROP IN 2021 Colliers sees office lease rates in Cebu declining by 8% in 2020 before posting a 3% annual growth in 2021. In our opinion, the slowdown in office In 2019, prior to the COVID-19 pandemic, the IT and Business Process leasing is affecting not just Metro Manila but also key locations such as Cebu 7 Association of the Philippines (IBPAP) noted that the growth in employment and Davao. in the outsourcing sector was primarily due to more jobs created in outsourcing sites beyond Metro Manila, including Cebu. While investors take Colliers believes that a recovery in 2021 will likely hinge on Metro Manila- a wait-and-see stance and plan to revisit leasing options in the next three to based occupiers’ decisions to diversify locations and lease space in Cebu, six months due to the pandemic, we see the government-projected along with the overall expansion of national and regional economies in 2021 economic recovery in 2021 contributing to greater office space absorption in which should partly encourage traditional occupiers to take up new office Metro Cebu during the period. We see this trend continuing and this should space. raise Cebu’s proportion of Filipino outsourcing employees, which currently Overall, Colliers sees a quicker pace of rental recovery amongst buildings stands at about 10%. located in Cebu IT and Business park and their fringes as new and expanding Note: 7IBPAP is the umbrella association for the Information Technology and Business Process Management (IT- occupiers gravitate towards these locations. BPM) firm of the Philippines. 8Manila Bulletin, DOLE Sees Resurgence of BPO Jobs, 2020 3 Primary Author: For further information, please contact: Joey Roi Bondoc David A.