Modest office market recovery expected
Demand to come from technology, finance sectors
THE Klang Valley office market is anticipated to remain stable with modest recovery this year, underpinned by sustained demand for office spaces from various sectors such as technology, finance and professional services.
Knight Frank, in its “Real Estate Highlights” report for the second half of 2023 (2H23), says demand for office space will be driven by the “flight-to-quality” trend and growing awareness of environmental, social and governance (ESG) factors.
“Despite prevailing soft conditions, Malaysia stands as a top choice for corporate entities seeking to establish new offices within the region, capitalising on its economic prospects, central geographical location, skilled workforce and competitive startup costs.”
Zerin Properties chief executive officer Previn Singhe says the office market moved well into 2023, with many big tenants relocating to new green buildings.
“With ESG in mind, there have been strong tenant relocation movements seen in the market,” he tells Starbizweek.
Savills Malaysia Sdn Bhd worldwide occupier services head Zawani Abidin notes that 2022 was a bounce-back year for offices, adding that the “newer crop” of Grade A buildings have seen a rise in occupancies.
“It has been an active year for Savills Leasing. After years of a tenant’s market, we see a slow swing back slightly to the landlord’s end, who are beginning to push back on too flexible tenancy terms and the long rent-free periods, as seen since the pandemic hit.
“However, with the oversupply and limited new entrants, tenants had an upper hand in 2023.”
Zawani adds that while many companies explored hybrid-working models (and either contracted or expanded accordingly), she emphasises that offices are essential for most organisations today.
“This has led to searches for areas to meet their technology, sustainability and health goals. Older buildings that now fall below requirements will continue to struggle to either attract and/or retain tenants.”
With the limited supply in the Kuala Lumpur (KL) suburban area (enclaves of KL Sentral, Mid Valley and KL Eco City) for Grade A and flex spaces, Zawani says KL City should see more activities into 2024.
Overall, with the large supply of recently completed as well as incoming space, CBRE |WTW says the asking rental and occupancy rate of purpose-built office (PBO) space within the Klang Valley will be under pressure.
“New supply will also result in greater competition and widen the gap between older and newer PBO buildings.
“Demand for more refined and flight-togreen office space is increasing, which could surpass supply in the coming years,” says the property consultancy in its Real Estate Market Outlook 2024 report.
Knight Frank says the positive momentum for new offices may face challenges, especially in the KL City area, given the recent increase in office supply by 1.8 million sq ft in 2H23.
“This influx poses potential challenges for rental and occupancy rates in achieving substantial growth, heightening competition within the existing surplus stock.
“Nevertheless, with the newly completed Merdeka 118 reported to be almost 70% tenanted, the effective new supply from the new completions is expected to provide some relief on current downward supply pressure.”
Additionally, Knight Frank says new government initiatives aimed at attracting venture capital and fostering startup incubation, coupled with the growing presence of major multinational corporations in the Klang Valley, are anticipated to generate additional interest and activity in the office market.
It says the KL Fringe and Selangor sub-markets are expected to remain relatively resilient, buoyed by sustained demand for quality spaces in decentralised locations with available infrastructure and highly accessible rail networks.
“In particular, Grade A office buildings with green certifications and Malaysia Digital status are anticipated to experience better demand.”
As more organisations embrace hybrid workstyles, Knight Frank says demand for co-working and flexi spaces will continue to be sustained, accommodating evolving work models.
“Larger corporate clients are increasingly turning to these spaces in addition to traditional clientele such as startups, small and medium enterprises and remote workers.
“Responding to this shift, several landlords and real estate investment trusts (REITS) are noted to be exploring co-working trends in order to offer better flexibility and attract tenants.”
Sentral-reit and TOWER-REIT, which announced their latest financial results last month, said they expect the office market to remain challenging this year.
Sentral-reit, with 88% of its diversified segmental contributions coming from the office sector, said it will continue to focus on asset management and leasing strategies that are centred on cost optimisation and tenant retention in the current operating environment.
“Efforts will be intensified to market the available office space under the portfolio with the focus on bringing in new tenants from the IT, ecommerce, serviced office and shared services sectors,” it said in a Bursa Malaysia filing on its latest corporate results.
TOWER-REIT, meanwhile, said the office rental market remains challenging particularly in the Klang Valley, mainly due to the high vacancies from the mismatch in supply against demand, competition in rental rates, rising operating expenses and elevated interest cost.
“Ongoing refurbishment initiatives remain a key focus to improve building attributes and leasing pipeline and enhance ESG performance.”
Refurbishments, together with diligent cost management, remain the strategic imperatives to protect and sustain the competitive position of its portfolio of buildings, said the company.
Tower-reit’s portfolio currently comprises interests in three premium, Grade A office assets valued at over Rm800mil in the Klang Valley, namely, Guoco Tower Menara HLX and Plaza Zurich.
According to Knight Frank, the average rental rates in KL City were analysed higher at RM6.48 per sq ft per month in 2H23 (compared with RM6.40 per sq ft in 1H23).
This, it said, was attributed to the higher achievable rental rates of the Merdeka 118 tower, which was designed with higher building specifications.
“In the KL Fringe, the average rental rate continued to improve, recording at RM5.73 per sq ft per month (1H23: RM5.67 per sq ft per month).
“Similarly in Selangor, the average rental rate rose to RM4.16 per sq ft per month (1H23: RM4.14 per sq ft per month).”
Knight Frank says the upward rental trend was sustained by demand for high-quality office spaces in decentralised locations, characterised by good accessibility and established surrounding amenities.
“Overall, leasing inquiry activities are observed to be on the rise, as growing companies seek to expand/revisit their current workspace strategies, leveraging on the tenant-led market to upgrade the quality of their existing office spaces,” it says.
“After years of a tenant’s market, we see a slow swing back slightly to the landlord’s end, who are beginning to push back on too flexible tenancy terms.” Zawani Abidin