Drop in rents to bottom out this year

Written by Miguel R. Camus / Reporter

THE continued drop in rental rates for office spaces may bottom out by the end of this year, as companies led by the business process outsourcing (BPO) sector snap up long-term lease contracts on what industry watchers say are bargain deals. As a result, real-estate service firm Jones Lang LaSalle Leechiu expects the current oversupply in office spaces to correct itself before 2011, as companies that earlier postponed expansion plans try to take advantage of the lower rates. “We went through a very rough second quarter in 2009, as many companies decided to postpone transactions [for office spaces] because of the uncertainty in the financial markets, particularly in the US,” said David Leechiu, country manager of the Jones Lang LaSalle Leechiu, during a lunch briefing. “But our [research] tells us that the end of this year will be the peak of supply, and every quarter thererafter, the supply will contract significantly.” He added that rental rates will start to increase by the third quarter of next year, indicating a faster recovery process compared with the 1997. Asian Financial Crisis, which took more than five years for prices to stabilize. In the months of April to June in 2009, rates for prime office spaces in Makati City have dropped 42 percent to P700 per square meter (sqm) per month from the comparable period last year. This is the steepest drop among the 12 areas in Metro Manila compared by Jones Lang LaSalle Leechiu- and is followed by Northgate Cyberzone in Alabang City, which saw a 39-percent decline in rent to P400 per sqm per month. Jones Lang LaSalle Leechiu chief operating officer Lindsay Orr said rental rates are expected to decline further in the second half of 2009, though at a slower pace, and will hit its bottom by the end of the year. “We see this as an opportunity for tenants to go long-term, because rents will not be this cheap forever,” said Leechiu. Much of the firm’s optimism is hinged on the uptake by large multinationals in the BPO, information technology and banking industries which previously committed in taking a total 195,000 sqm of office space in the first semester of the year. Leechiu explained these transactions were postponed until a more stable global economy was on the horizon, something he indicated is slowly emerging. “It’s a chicken and egg situation… these [transactions] have to happen first before the floor-rental prices are set,” said Leechiu, “But from the positive news reports we hear, like a recovery in the stock markets, we think in the next four to six months, these deals will all be completed.” Other factors helping the industry are the availability of credit and a ready pool of talent for the BPO sector, which corners a significant share of the office market. Another advantageous development: global “captives” undertaking their own BPO operations like JP Morgan Chase, Deutsche Bank and The Hongkong and Shanghai Banking Corp. and Citibank. Leechiu said that many companies are also “revisiting” the importance of being in Makati City as opposed to other locations nearer their labor sources such as the Manila Bay area, or Quezon City to the north. At present, third-party BPOs are looking to provinces like Cavite, Laguna, Rizal and Laoag for expansion but Leechiu admitted the lack of suitable infrastructure is hampering potential developments in these areas. In addition, data compiled by Jones Lang LaSalle Leechiu since the start of the decade indicates that political turmoil has no effect on the BPO industry. Jones Lang LaSalle Leechiu was created by the merger between Jones Lang LaSalle Inc. and Leechiu & Associates early last year. The new firm serviced more than half of the 1.4 million sqm of office space occupied by the BPO industry in 2008.