MANILA BULLETIN - February 1, 2008

US recession seen to drive demand for BPO facilities here

Despite the appreciation of the peso, Business Process Outsourcing (BPO) players in the Philippines are continuing to expand, projecting an annual growth of 40 percent to $ 7 billion this year from the 2006 level of $ 5 billion.

Significantly, the anticipated economic slowdown in the US is prompting companies to go global via offshoring and outsourcing to save on costs. "Some companies still see Metro Manila as a safe and conservative location while others who have been operating BPO centers for more than 3-4 years here are confident the prospects of going provincial are worth it," according to Joey M. Radovan, Vice Chairman and Head of Global Corporate Services of CB Richard Ellis Philippines. "We see a balance on the growth prospects for space between Metro Manila and the provinces."

While the Philippine call center industry is likely to feel the brunt of a looming US recession as large global corporations cut back on investment spending, the increase in Offshoring and Outsourcing of back office operations of most US companies will offset shortfalls for voice-related BPO business.

For most Fortune 500 companies, the key to survive the current US recession is to maintain their revenue levels by saving on operational cost through their back office operations.

Filipino accountants, engineers, architects, and animators fill in the ongoing contraction in the US economy and drive the offshore demand for labor, office space and incidentals in the Philippines.

CBRE also sees a continuous influx of US companies outsourcing in the country. On the supply side, a total of 613,804 square meters is scheduled to be completed this year across Metro Manila. This will cater to BPO demands in areas like Bonifacio Global City, McKinley Hill, Northgate Cyberzone, UP Science & Technology Park.

CBRE foresees a lack of supply in the provinces for quality space to serve the BPO demand though that can change as provincial sites gets more interest.

"We also see the shift in preference of BPO players to campus-style settings that offer 4-10 storey structures in a bid to manage efficiency as experienced in operating in high-rise buildings," Radovan noted. "Low-rise buildings are also low-cost maintenance and offer exclusive occupancy to a sole occupier."

Meanwhile, the traditional office space in the Makati CBD vacancy remains low at 1% with no new Grade A space completing this year. Movement from multinational/non-BPO firms have been limited as they renew in existing premises due to the rising rents of Prime Grade A space weighed at P1,200 per square meter for 2007.

CBRE also anticipates the relocation from such firms to Grade B space since Grade A space have reached an all time high. Rents in the Makati CBD are seen to be stable as further increase might drive out more BPO firms that occupy close to 60% of the newer Grade A space to lower costs space.

This can also be viewed as a positive to other locations bringing the balance of driving overall growth to areas where no major office developments existed before.

At this time, most if not all of new office business being built within Metro Manila and Metro Cebu are 100% committed to tenants through pre-leasing leaving no buffer for immediate need for office for new entrants and/or existing office expansion. This demonstrates the caution being employed by local developers both old timers and new comers to avoid the recurrence of another local property industry crash.