COLLIERS ANNUAL OFFICE | DAVAO | RESEARCH | 2019 | 22 MAY 2020 Joey Roi Bondoc DAVAO POST-PANDEMIC OFFICE RECOVERY Senior Manager | Research | Philippines +63 2 8858 9057 Occupiers and developers seize opportunities amid a lukewarm office market [email protected] Insights & 2020–22 Andrew Gomez Recommendations End 2019 Full Year 2020 Annual Average Director | Office Services | Philippines +63 2 8863 4103 Davao City is one of the most > Colliers believes that demand from both [email protected] competitive outsourcing from traditional † and outsourcing firms will destinations in the Philippines, prop up office absorption as the market and one of only three Philippine Demand sentiment improves towards Q1 2021. 44,500 sq m 21,000 sq m 13,900 sq m cities that are in Tholons’ Top 100 global sites1 for outsourcing. Maricris Sarino > We project about 53,200 sq metres (572,400 Director | Office Services | Philippines However, the COVID-19 sqfeet) of new office space in 2020. While +63 2 8858 9015 pandemic will likely lead to we expect completion delays of up to two [email protected] quarters, we project 2020’s pipeline will still slower office leasing all over the Supply 4,300 sqm 53,200 sq m 17,700 sq m be completed this year. Philippines, including Davao City. Despite the challenges, Colliers Annual Average YOY/ YOY / sees office leasing opportunities Growth 2019–22 / End 2019 End 2020 for urban hubs outside of Metro End 2022 Manila including Davao especially > In 2020, Colliers sees a 10% decline in office 2.6% -10% -2% when market sentiment starts rents due to slower leasing. Rents should improving early 2021. bottom out in 2020 and then with increased leasing activity begin rising in 2021. Colliers encourages outsourcing Rent PHP 480 PHP432 PHP450 occupiers to lock in space in > Colliers sees vacancy rising to about 14.5% in integrated communities. -17.1pp +9.1pp +0.9pp Landlords, meanwhile, should 2020 due to slower leasing. The central bank is projecting a faster economic growth in highlight their property 2021 and we see this anchoring a rebound in Vacancy 5.4% 14.5% 8.0% management capabilities and office leasing in Davao City during the year. availability of PEZA-proclaimed Source: Colliers International. Note: 1 sq m = 10.76 sq ft. *Philippine Economic Zone Authority (PEZA) proclaimed spaces where locators enjoy tax and non-tax space* incentives. †Traditional includes companies in various sectors such as legal, engineering and construction, government agencies and flexible workspace operators. 1Tholons Services Globalization Index 2019. COLLIERS ANNUAL OFFICE | DAVAO | RESEARCH | 2019 | 22 MAY 2020 RECOMMENDATIONS Maximize Davao’s skilled manpower Colliers sees Davao as a competitive office site outside of Metro Manila due Lock in space in integrated communities to its skilled manpower. The city produces about 15,000 college graduates every year with about 46% having degrees in Business, Math, Science, and Colliers now sees occupiers looking for space in integrated communities to Information Technology. The city is also considered an education hub for the improve their business continuity plans. We see firms gravitating towards entire Mindanao group of islands. integrated communities to maximize the live-work-play amenities of these developments. In Davao City, about 43% of new space due to be completed Accelerated adoption of modern technology in 2020 is within an integrated community. Colliers believes that occupiers in Davao should also be more aggressive in Highlight property management and design requirements implementing modern technologies, similar to what their Metro Manila counterparts do. In our opinion, this is especially important for firms looking The COVID-19 pandemic has highlighted property management capabilities. to improve their business continuity plans. Moving forward, Colliers believes that occupiers are likely to be more discerning with design considerations (e.g. proper air circulation, more office Highlight Davao’s disaster resilience program space per employee, and glass ratio for natural sunlight) and property We believe disaster resiliency is likely to be among the major considerations management protocols including sanitation (e.g. implementation of of outsourcing firms when choosing alternatives to Manila. In this category, measures to avoid virus transmission) and emergency preparedness. Davao will likely be a key option as it is ranked as the third most disaster- Highlight Davao’s viability as a key hub ex-Manila resilient city in the country according to the Cities and Municipalities Index 20192, only behind Iloilo and Cagayan de Oro. Davao remains a viable outsourcing hub outside Metro Manila. According to Tholons, an outsourcing advisory firm, Davao City is ranked as the 95th most Highlight PEZA availability competitive outsourcing destination in the world. Davao is one of three In our opinion, developers need to highlight their PEZA-proclaimed spaces Philippine locations (along with Metro Manila and Cebu) to be included in especially if they want to capture the spillover demand from Metro Manila. the Top 100. Among the factors considered in the annual poll are quality of Colliers projects about 41,300 sqmetres (444,400 sqfeet) of PEZA supply in manpower; cost and infrastructure; risk and quality of life; and digital Davao city in the next 12 months. Colliers believes that Davao remains on innovation. Davao’s economy has also been expanding by 9.6% annually the radar of investors and leasing queries will likely materialize if there is from 2016 to 2018, fastest among key regions in the country. adequate PEZA space. GDP Growth Comparison, 2016-2018 Infrastructure-led development 2016 2017 2018 Davao is likely to be one of the major beneficiaries of the government’s Build, Build, Build program. Colliers believes that developable land around Overall Philippines 7.1% 6.9% 6.3% the proposed Davao Coastal Road, Davao Monorail, Mindanao Railway National Capital Region (NCR) 7.5% 6.2% 4.8% Project (MRP), and the Davao Bus Rapid Transit (BRT) should further be Davao Region 9.4% 10.7% 8.6% assessed for their feasibility for township projects that feature malls, hotels, Central Visayas 8.8% 5.2% 7.6% condominiums, and offices. These public projects due to be completed even CALABARZON 4.8% 6.7% 7.3% beyond the term of the current administration should ensure the viability of Source: Latest data available from the Philippine Statistics Authority. Note: CALABARZON = Cavite, adjacent township projects. Laguna, Batangas and Quezon provinces, which, along with Central Visayas, are two of the fastest growing regions in the country. 2Cities and Municipalities Competitive Index. 2 COLLIERS ANNUAL OFFICE | DAVAO | RESEARCH | 2019 | 22 MAY 2020 NEW SUPPLY IN TOWNSHIPS anchored by demand from traditional and outsourcing occupiers. Colliers believes that outsourcing occupants that are currently Metro Among the new office towers due to be completed in Davao in 2020 are Manila-centric are likely to scout for viable sites outside the capital region. Robinsons Cybergate Delta Tower 2, GT Corporate Center, Aeon Towers and Inspiria Condominium (Office Components). Davao City is the center of commerce for the Davao Region, which was the fastest growing region in the country from 2016 to 2018, based on the Another building due to be completed during the period is Damosa Land’s latest available data from the Philippine Statistics Authority (PSA). Hence, Diamond Tower at Damosa IT Park. The project is one of the largest office we see traditional occupiers partly driving demand in 2021. towers in the city with a leasable area of 22,900 sqmetres (246,400 sqfeet). In 2019 prior to the COVID-19 pandemic, the IT and Business Process For 2020, Colliers projects the completion of about 53,200 sqmetres (572,400 Association of the Philippines (IBPAP) noted that the growth in employment sqfeet). in the outsourcing sector is mainly attributable to more jobs created in outsourcing sites outside Metro Manila, including Davao. While investors 2020 new supply and % of total new supply take a wait-and-see stance due to uncertainty, we see the economic recovery in 2021 stoking office space demand in Davao during the period. 6K | 12% GT Corporate Center 23K | 45% Remaining PEZA space, 2020-2022, GLA (sq m) Damosa 17K | 33% Diamond Tower Remaining PEZA space Robinsons Cybergate Delta Tower 2 1K |2% Metro Manila Aeon Towers 340K Iloilo 4K | 8% 114K Cebu Inspiria Condominium (Office Component) 88K Bacolod Source: Colliers International Davao 18K OCCUPANCY TO RECOVER IN 2021 23K Colliers recorded about 44,500 sqmetres (478,800 sqfeet) of office space Source: Colliers International take-up in 2019. Similar to what we project in Metro Manila, we are likely to see a decline in leasing activities in 2020 due to the uncertainty brought RENTS TO DROP 10% about by the COVID-19 pandemic. Hence, we see 2020 vacancy reaching Due to slower leasing activities, Colliers projects office rents in Davao city 14.5% from 5.4% in 2019. declining by 10% in 2020. With an economic recovery in 2021, we see rents Economic analysts and credit rating firms are projecting a rebound in 2021. growing by about 2%. In our opinion, a recovery in office leasing is likely to be The Philippine central bank, while projecting GDP to contract by 0.8% in anchored by an expansion of traditional businesses in the city as well as a 2020, is looking at a 7.8% rebound in 2021. rebound in absorption from outsourcing tenants. If this materializes, we are also likely to see a recovery in terms of office Colliers sees leasing activities gravitating towards office spaces within integrated space leasing and this should spill over to key outsourcing outside Metro communities once market sentiment improves. Hence, we see lease rate growth Manila including Davao city. In our opinion, a recovery in 2021 is likely to be in offices within townships rising at a faster pace.