Cebu’s aging office buildings put landlords on notice as market slows

CEBU CITY, Philippines — Cebu’s office landlords are being pushed to get creative with aging buildings as the local market cools.

Roughly half to 60 percent of the Philippines’ 1.77 million square meters of national office stock is now 10 years or older, real estate services firm CBRE Philippines reports.

Metro Manila’s Makati, Fort Bonifacio, Quezon City and Alabang carry the heaviest concentrations of aging buildings.

But it’s also a trend that’s already being felt in Cebu, said MJ Castro, CBRE’s Head of Operations for Property Management.

“Landlords now are playing defense,” Castro told reporters in a recent media briefing.

This outlook comes as CBRE reported a slowdown in IT-BPM demand, historically the main driver of Philippine office absorption.

Average take-up per transaction in the sector has fallen to roughly 1,014 square meters, down from around 1,300 square meters over the past three years and about 2,500 square meters before the pandemic.

The group also attributed the decline partly to the growing use of artificial intelligence in repeatable, lower-level tasks.

“AI might not be the only cause, but… I think we’re already starting to see it in the market,” Zoilo Paras, Senior Manager for Office Leasing, said.

Aging buildings

Many of Cebu’s older office towers trace their problems back to how the market developed.

Local developers once dominated the city’s inventory, and many early buildings were handed over without air-conditioning systems already installed.

According to CBRE Philippines Country Head Jie Espinosa, it was a standard that only changed once national developers entered the market with fully air-conditioned turnover packages.

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“A lot of those first-generation assets, which were initially offered to BPO companies, are now bearing the burden of aging mechanical systems,” said Espinosa.

Post-Pogo

The past boom in Philippine offshore gaming operators, or Pogos, also left a separate legacy.

Experts said some Cebu landlords benefited because unused floors were kept available for expansion.

However, buildings with fully fitted-out Pogo floors are now largely unusable for information technology and business process outsourcing, or IT-BPM, tenants without costly retrofitting.

“If you offer those spaces to an IT-BPM company, it might actually cost them more to retrofit or build anew. So the landlord needs to make a pragmatic decision and deal with that cost themselves. If they don’t, the cost of waiting — leaving space idle — can actually be higher,” said Zeth Soria, Director for Office Leasing.

That’s why the property research firm advised landlords against jumping straight into major capital spending.

Instead, it recommended a “phased approach” starting with technical due diligence to identify low-cost fixes, followed by a reassessment of floor plates, amenities and building facilities against tenant expectations.

“You don’t need to spend big right away because that’s capital-intensive. First, identify the quick wins that allow you to compete with newer buildings,” Castro said.

Common utility service charges, or Cusa, have also become a bigger factor in leasing decisions, CBRE said, since tenants weigh these charges alongside base rent when deciding whether to renew or relocate.

“CUSA can be a turning point for them — it can determine whether they proceed with a lease or not,” added Castro.

Healthcare

Meanwhile, healthcare-focused work has emerged as a bright spot offsetting some of that decline, CBRE said, citing the Philippines’ steady output of medical graduates as an advantage U.S. companies are increasingly tapping.

CBRE said landlords should also weigh environmental, social and governance (ESG), certification as a competitive tool, noting that many occupiers now factor building certification into leasing decisions even when the cost of pursuing it is relatively low.

New office supply is expected to come online in Cebu by the end of the year, according to CBRE, giving existing landlords a limited window to upgrade before tenants can directly compare older buildings against newer stock.

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