The shrinking office space

The coronavirus disease (Covid-19) pandemic and the resulting MCO has forced companies to consider how they are using their office space, according to property consultancy Savills Malaysia Sdn Bhd managing director Datuk Paul Khong.(pic)

SIX months into the movement control order (MCO), an employee of a subsidiary of a listed company says it has reduced the number of floors it is occupying.

“The space freed can be rented out, ” says the employee who declines to be named. The consolidation was done during the MCO period.

By freeing up that one entire floor of about 13,000 sq ft, it was able to save utility bills amounting to about RM100,000 a month. It also has 150 unoccupied cubicles.

In another case, the leasing head trying to fill a brand new building says tenants are generally committed to their pre-MCO obligations.

A tenant seeking to have an option to extend the space will likely drop that idea, while another will operate over three shifts because of physical distancing.

“Employees from the first shift will not meet those from other shifts, ” the source says.

The coronavirus disease (Covid-19) pandemic and the resulting MCO has forced companies to consider how they are using their office space, according to property consultancy Savills Malaysia Sdn Bhd managing director Datuk Paul Khong.(pic)

“Technology will continue to disrupt and change our workforce composition and the way we work today, ” he says.

The current situation suggests that it is possible to work from home, if the right tools and connection are available.

But the real impact -- office demand -- based on the way we work today, is “still yet to be seen, ” Khong says. Already, he is seeing companies relocating on a stricter budget, or going for outright downsizing.

Another source says: “The office market is dead, locally and internationally. There is no office expansion because economic activities are at a standstill.

“Whatever space they have, companies are shrinking it by between 30% and 70%, ” he says. He expects the current situation to go on until the end of next year, for both advanced and developing countries.

“There is a double whammy hitting the office market -- working from home and little business expansion."

“If you look at the market now, it is totally out of whack. I am working from home. If I go to the office, I have another problem, physical distancing. I and my clients are asking -- how safe is the office? “ the source, who has nearly 40 years of experience in real estate lamented.

“The only companies that are doing well are online businesses, gloves, personal protective equipment (PPE) companies,” he said.

Companies are considering hygiene and safety issues. They are asking how often the stale air in the air-conditioning system is being cleared? Does the building have ultra violet light that kills germs, like some advanced buildings in Singapore?

So there is a flight to newer and safer buildings.

Flight to safety

The 150 unoccupied cubicles are in a green building in the Kuala Lumpur City Centre (KLCC) with a rental rate between RM5 and RM6.90 per sq ft, according to an online property website. Even before the pandemic, office rental has come under pressure.

Prime purpose-built offices in the city stabilised at around RM7 per sq ft in 2010 with average occupancy at 86.6%, according to a September 2010 press report, quoting two property consultants.

Savills’ Khong says office rental rate has been flattish over the last decade as more new spaces, in large numbers, are added to the office market annually.

“We saw about 18.9 million sq ft of space coming in the last four years averaging at 4.7 million sq ft per annum, ” he says. This resulted in occupancy sliding over the last four years at an average of 1.5% per annum, ” Khong says.

Occupancy rate is averaging about 75% for the total 134 million sq ft as at Q2,2020, he says. In the KLCC area, the average occupancy was 84% for 2010, according to National Property Information Centre Q42010 Commercial Property Stock Table. It is 78% today, Napic reported in its Q1,2020 Commercial Occupancy and Space Availability Report.

Khong says building owners are “struggling” to maintain gross rents and occupancy. This has resulted in some owners exchanging high rental rates and initial yields to raise occupancy. It is a “trade-off” forced on them because of the flood of office space and the poor business climate.

“Some landlords now help in the fit-out costs for major anchor tenants only and amortises the rents over the period of the lease, ” he says.

It costs at least about RM150 per sq ft to RM250 per sq ft to fit out a standard empty office space.

This can rise to RM400 or more depending on the grade and specifications.

The employee from the Grade A building consolidation says technology has helped the company to reduce workers and office space needs.

“Those who resigned were not replaced. Tech has allowed remaining employees to do the additional work. This was already happening pre-MCO. Tech has also allowed people to work from home.

“Secondly, our company has gone into three three shifts during the MCO period. Although it is just 30 minutes apart, with the first group starting work at 8am, it makes a lot of difference.

Because staff come in at three different times, they go for one of three lunch breaks in order to reduce the crowd at such peak times.

Close to six months after the MCO was imposed on March 18, and eight months into the year, Savills’ Khong expects companies to re-consider their space requirements with the working from home theme taking centre stage.

For now, office space may have “taken a hit” but the office will still be required in many sectors.

“But companies will not compromise on safety and quality, ” Khong says.

A third property consultant who declined to be named says it is no longer possible to look at the office market homogeneously. It is in deep oversupply mode, and it is “a must” to divide the good ones with facilities and which already have good long-term tenants and the larger proportion of office buildings which do not have the facilities to attract tenants.

“Their rent will drop only after the tenancy expires. They may continue to want to be there so the buildings will be ‘safe’, ” the source says.

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