Philippine office landlords are likely to face a more difficult second half of the year as weak demand and aging buildings continue to weigh on the market, while industrial assets and provincial retail properties present stronger investment opportunities for developers, CBRE Philippines said.

The commercial real estate services firm said the office market would need more than 500,000 square meters of take-up in the second half to match last year’s level. In property market terms, take-up is a key measure of leasing demand, so the required volume highlights the scale of activity needed for the sector merely to keep pace with the previous year.

“We should be bracing ourselves for that,” CBRE Philippines Country Head Jie Espinosa said on Thursday during the firm’s second-quarter market briefing.

Mr. Espinosa said developers are dealing not only with slower leasing activity but also with an aging office inventory that could make competition for tenants more difficult.

“It’s not just about vacated spaces anymore. Spaces that were left behind by locators. Beneath all of those vacated spaces, which would be more than 50% of the market at this stage, you have a lot of aging buildings behind them. Approaching 10 years, perhaps more than 10 years. A lot of the developers now will have to grapple with the fact how do they become more competitive.”

He said landlords that lose tenants in the current environment may have to wait for extended periods before finding replacements, a challenge that puts more focus on tenant retention and the competitiveness of older buildings against newer supply.

“If a landlord were to lose a tenant at this stage, and they would have to face the consequences of waiting to backfill it, it could take almost one to four years for them to wait just to be able to replace that particular space,” he said.

In contrast, Mr. Espinosa said the industrial and logistics segment remains the strongest-performing sector in the property market and is expected to maintain its momentum through the second half.

“Our industrial and logistics sector has had a banner first half so far. We expect that to be true for the second half as well.”

“We really think that of all of the sectors, if I were to be a developer, that’s the particular sector where I could justify investing and I would be able to expect better yields compared to all of the assets that I could probably consider,” he added.

Mr. Espinosa also pointed to opportunities in retail, particularly in provincial markets where overseas Filipino worker (OFW) remittances continue to support consumer spending.

“If you look at the way we look at our business, the way we’re trying to diversify, we understand that retail still has a runway to go. And it’s not necessarily in National Manila.”

“The provincial markets where your remittances typically go, the majority of your $35.6 billion of remittances, that’s going to create structural demand in key urban areas outside of Metro Manila.”

He said local developers should make better use of idle landholdings to capture demand beyond the capital region, where remittance-supported spending can shape demand for retail space in urban centers outside Metro Manila.

“Most of these local developers typically require tie-downs. At this time, they’re sitting on idle asset. They have a lot of land. They’re probably well land-bound. And they have to trigger the possibilities of those assets that they currently have,” he said.

Mr. Espinosa also called on the industry to prepare for the long-term impact of artificial intelligence (AI) on office demand and employment.

“And that’s why for this quarter, the question that we’re posing in the market is, how will we survive AI?”

He said the Philippines needs to ensure that its workforce remains competitive as AI creates new industries and changes requirements for office space. The issue is especially relevant for an office market already carrying a large amount of space that needs to be absorbed across Metro Manila and provincial locations.

“Will we be able to be competitive enough to backfill all of these 1.7 million square meters that we currently have, not just in Metro Manila, but in provincial locations? Is the labor that we currently have lying in wait?”

“I think those are the more important questions frame that we need to answer,” he added. — Juliana Chloe A. Gonzales