KMC Research Metro Manila Office Briefing 2Q 2020 Metro Manila | Office Briefing Metro Manila Office Submarkets Future Stock (2023) DEVELOPMENT PIPELINE (2020-2023) CURRENT STOCK MAP 1 843,546 sq m 416,392 sq m QUEZON CITY C5 CORRIDOR 1,217,214 sq m 576,733 sq m ORTIGAS CENTER MAKATI FRINGE 460,540 sq m GREATER ORTIGAS 1,408,830 sq m MAKATI CBD NAIA 2,234,737 sq m BONIFACIO GLOBAL CITY 1,191,083 sq m BAY AREA 439,947 sq m MCKINLEY METRO MANILA CITIES QUEZON CITY SAN JUAN CITY CITY OF MANILA MANDALUYONG CITY 647,387 sq m MAKATI CITY PASIG CITY ALABANG PASAY CITY TAGUIG CITY PARAÑAQUE CITY MUNTINLUPA CITY LAS PIÑAS CITY 2 2Q 2020 Metro Manila GRAPH 1 ■ Without any new completions, Metro Manila saw Stock & Vacancy an increase in office vacancies of around 58,600 sq m in 2Q/2020. The vacancy rate increased by a full percentage point to 6.5% during the Metro Manila CBDs Grade A Office Stock Metro Manila CBDs Grade A Office Vacancy Rate quarter. A decrease in the demand was seen 8,000 12% across most submarkets, with both BGC and Ortigas Center taking the biggest declines in 6,000 9% occupancy. We expect majority of the delayed buildings to come online by 4Q/2020 at the earliest. However, given the circumstances, the 4,000 6% incoming pipeline may add more pressure to the '000 sq m (GLA) office market. 2,000 3% ■ Average rental growth in Metro Manila managed a 2.7% YoY increase to PHP 1,020.8 per sq m / 0 0% month. However, as the pandemic continues to 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F put pressure on the office market, we observed Source: KMC Savills Research overall rents decline by 0.3% from the previous quarter. Majority of the submarkets recorded a GRAPH 2 quarterly slide, with Ortigas Center taking the Supply & Take-Up biggest hit. We expect a downward repricing of base rents in the near term if current market Metro Manila CBDs Grade A Office Supply conditions do not improve. Metro Manila CBDs Grade A Office Take-Up 1,200 ■ With 2Q/2020 representing the first full quarter 1,000 of Metro Manila under quarantine, there are early 800 signs that overall office demand may be slower in the coming months; although we foresee 600 the offshore and outsourcing (O&O) sector to '000 sq m (GLA) 400 compensate the slack post-COVID. Amidst the pandemic, demand from the Philippine Offshore 200 Gaming Operator (POGO) sector may wane due to operational difficulties caused by the 0 stringent lockdown and increased pressure from -200 tax authorities. The sector has been dominantly 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F responsible for the tight vacancies in some Metro Source: KMC Savills Research Manila submarkets since 2017. TABLE 1 Key Figures - Grade A Office Makati Ortigas Quezon 2Q 2020 Unit BGC Alabang Bay Area CBD Center City PHP/sq m 1,150.1 1,036.2 695.7 694.7 756.4 871.1 Average net rental rate USD/sq ft 2.09 1.89 1.27 1.26 1.38 1.58 PHP/sq m 1,600.0 1,400.0 900.0 725.0 825.0 950.0 Upper net rental rate USD/sq ft 2.92 2.55 1.64 1.32 1.50 1.73 Vacancy rate % 1.8% 4.3% 16.2% 5.3% 13.2% 3.7% Current Stock sq m 1,191,611 1,829,458 759,357 551,299 739,051 872,157 Development Pipeline sq m 217,219 405,279 457,857 96,089 104,495 318,926 2020-2023 * Makati CBD includes Premium Offices kmcmaggroup.com/research | 3 Metro Manila | Office Briefing Makati CBD GRAPH 3 GRAPH 4 Stock & Vacancy Supply & Take-Up Makati CBD Premium and Grade A Office Stock Makati CBD Premium and Grade A Office Supply Makati CBD Premium and Grade A Office Vacancy Rate Makati CBD Premium and Grade A Office Take-Up 1,400 7% 140 1,200 6% 120 100 1,000 5% 80 800 4% 60 600 3% '000 sq m (GLA) '000 sq m (GLA) 40 400 2% 20 200 1% 0 0 0% -20 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F Source: KMC Savills Research Source: KMC Savills Research GRAPH 5 GRAPH 6 Rental Performance Development Pipeline Makati CBD Rental Growth, YoY Makati CBD Premium and Grade A Office Rental Index 140 Metro Manila CBDs Grade A Office Rental Index 160 30% 120 140 20% 100 120 10% 80 100 0% 60 80 -10% (GLA) '000 sq m 3Q 2007 = 100 3Q 2007 40 60 -20% 40 -30% 20 0 2019 2020F 2021F 2022F 2023F Source: KMC Savills Research Source: KMC Savills Research MARKET IN MINUTES ■ Makati CBD remains resilient despite the overall demand weakness while other submarkets suffered substantial losses. As a result, the submarket experienced just a slight increase in vacancies to 1.8% in 2Q/2020. ■ Average rents in Makati CBD were nearly flat from the previous quarter, registering a marginal increase of 0.1% QoQ to PHP 1,150.1 per sq m / month. Landlords remain in the wait-and-see stance before considering to reprice base rents. ■ Based on data from the first half of the year, there has already been cancellations of nearly 20,000 sq m of pre-committed space in Makati CBD. We do expect a lower rate of demand in the upcoming quarters as organizations reevaluate their office requirements. However, we should still expect the CBD to outperform all submarkets with vacancies remaining in the low single digits throughout the year. 4 2Q 2020 Bonifacio Global City GRAPH 7 GRAPH 8 Stock & Vacancy Supply & Take-Up Bonifacio Global City Grade A Office Stock Bonifacio Global City Grade A Office Supply Bonifacio Global City Grade A Office Vacancy Rate Bonifacio Global City Grade A Office Take-Up 2,400 6% 400 2,000 5% 300 1,600 4% 1,200 3% 200 '000sq m (GLA) '000 sq m (GLA) 800 2% 100 400 1% 0 0% 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F Source: KMC Savills Research Source: KMC Savills Research GRAPH 9 GRAPH 10 Rental Performance Development Pipeline Bonifacio Global City Rental Growth, YoY Bonifacio Global City Grade A Office Rental Index 300 Metro Manila CBDs Grade A Office Rental Index 180 40% 250 160 30% 140 20% 200 120 10% 100 0% 150 80 -10% '000 sq (GLA) '000 m 3Q 2007 = 100 3Q 2007 100 60 -20% 40 -30% 50 20 -40% 0 2019 2020F 2021F 2022F 2023F Source: KMC Savills Research Source: KMC Savills Research MARKET IN MINUTES ■ Construction timelines in BGC continue to be delayed, with the earliest completions forecasted to come in 4Q/2020. Compounded by the effects of the lockdown, the district’s vacancy rate increased from 3.0% to 4.3% – an additional 23,500 sq m of available office space. ■ With many leasing decisions put on pause and the worse-than-expected surge in vacancies, average rents in BGC slipped in 2Q/2020. Average rents for the quarter closed at PHP 1,036.2 per sq m / month, contracting by 0.1% QoQ – the first quarterly decline since 2009. ■ BGC saw the highest number of new vacancies during the quarter – even with PEZA-accredited buildings. The flight of occupiers from the darling business district is an ominous signal to the rest of Metro Manila. On the other hand, the size of pre-committed space has been relatively unchanged which still signifies a strong rebound late this year or in 2021. The signals are mixed in the submarket, but we expect long-term optimism to wane if existing conditions persist. kmcmaggroup.com/research | 5 Metro Manila | Office Briefing Ortigas Center GRAPH 11 GRAPH 12 Stock & Vacancy Supply & Take-Up Ortigas Center Grade A Office Stock Ortigas Center Grade A Office Supply Ortigas Center Grade A Office Vacancy Rate Ortigas Center Grade A Office Take-Up 1,200 40% 400 300 900 30% 200 600 20% '000 sq m (GLA) 100 '000 sq m (GLA) 300 10% 0 0 0% -100 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F Source: KMC Savills Research Source: KMC Savills Research GRAPH 13 GRAPH 14 Rental Performance Development Pipeline Ortigas Center Rental Growth, YoY Ortigas Center Grade A Office Rental Index 400 Metro Manila CBDs Grade A Office Rental Index 160 30% 140 20% 300 120 10% 100 0% 200 80 -10% sq (GLA) '000 m 3Q 2007 = 100 3Q 2007 60 -20% 100 40 -30% 0 2019 2020F 2021F 2022F 2023F Source: KMC Savills Research Source: KMC Savills Research MARKET IN MINUTES ■ Vacancies continued to increase in Ortigas Center which rose to 16.2% of Grade A office stock. Although net absorption was negative at nearly 15,000 sq m, there was still some traction in the submarket – notably with Jollibee Tower. Conversely, the Podium West Tower continues to struggle and leads the submarket in terms of vacancies. ■ Ortigas Center is wedged in an unfavorable condition as the pandemic abruptly cut occupier demand while it swims in new office stock. As a result, average rentals continue to be in a downward trajectory, posting a 0.9% YoY contraction to PHP 695.7 per sq m / month.