Saturated office market

“The oversupply of office space is further exacerbated by limited demand, especially since the pandemic, as many organisations are opting for a hybrid working environment today,” an analyst said. — Bloomberg

MALAYSIA’S office market is expected to remain saturated amid high supply, with landlords needing to take proactive steps to improve their product offering.

An analyst says the office market, especially within the Klang Valley, is still expected to remain challenging.

“The oversupply of office space is further exacerbated by limited demand, especially since the pandemic, as many organisations are opting for a hybrid working environment today,” he tells StarBizWeek.

Another analyst says demand for offices in good locations with the latest technological and environmental standards will still continue to be sought after, especially by multinational corporations.

“There is a growing mismatch in terms of supply and demand for office space as many multinational companies embrace a hybrid work culture.

“Nevertheless, premium or green-rated buildings are gaining popularity, especially among corporations that are looking to meet their sustainability objectives.”

According to the National Property Information Centre’s (Napic) 2022 Property Market Report, the overall performance of the office segment continued to soften last year, as the overall occupancy rate declined further to 78.5%, down from 78.9% in 2021.

“The private office buildings recorded average occupancy rate at 71.7%, down from 72.3% in 2021.

“Penang secured a higher occupancy rate at 80.9% while Kuala Lumpur, Selangor and Johor recorded lower than the national level at 72.1%, 67.3% and 59.1%, respectively.”

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Napic says private office buildings in Putrajaya recorded the lowest occupancy rate in the country at 49.4%.

According to Rahim & Co in its Property Market Review for 2022/2023, the office market continues to face a saturated environment of high supply against stagnant rental demand.

“This is especially for Kuala Lumpur and Selangor, as both combined have a total of 154.2 million sq ft of office space; 59.3% of the country’s total stock.

“As demand remains behind supply, the injection of 3.7 million sq ft in new office supply within the 12 months has resulted in occupancy rate to fall further for Klang Valley, from 72.1% in the first half of 2021 to 70.9% in the first half of 2022.”

The property consultancy firm adds that this leaves approximately 44.8 million sq ft of vacant space currently sitting idle in the market.

“But the persisting gloom is not a blanket situation for all as certain areas are more in demand than others.

“For office buildings located on the fringe, lesser traffic congestion and public transportation access adds further appeal in comparison to those within the city centre.

“The evolving remote and hybrid-work landscape and preference also has its impact on the type of need and preference current tenants have,” it says.

While office workers have gradually returned back to physical offices, Rahim & Co says many have also returned with a new set of expectations to complement the rising practice of hybrid-working.

“As companies are now competing against the comforts of home in attracting employees back to the office, the next best strategy is to incorporate certain elements of home into the office and make the overall working experience to be healthier and more accommodating.

“As the data behind the workplace is now put under the microscope, occupiers are viewing office spaces as more than just an arrangement of cubicles and desks, leaning ever more to visually appealing, collaborative, multi-functional and inclusive spatial designs.”

For building owners, the property consultancy says asset enhancement initiatives and flexible leasing packages continue to be the way of retaining and adding tenants within a highly competitive market.

Meanwhile, office-based real estate investment trust (REIT) company Tower-REIT, in a statement following the announcement of its financial results, is maintaining a cautious outlook for the industry.

“The office rental market remains challenging with the over-supply of office space particularly in the Klang Valley as more organisations, especially multinational corporations, continue to re-evaluate their workplace strategies and requirements.

“This situation is further exacerbated by an increase in electricity tariff, inflation of input costs, rising interest rates and labour costs,” it says.

While there have been improvements in leasing activities, Tower-REIT says tenants remain cautious in making commitments and are taking time to recover to pre-pandemic levels.

“Nevertheless, the manager continues to take proactive steps to improve its offering to target markets, enhance its service level, adopt strategies and operational measures to manage costs.”

According to Napic, the office rental market portrayed a mixed performance in 2022.

“In Kuala Lumpur, several office buildings witnessed double-digit growth namely Menara Perak (16.9%) and Wisma Boustead (15.7%).

“A higher rental was seen at Wisma Genting, Jalan Sultan Ismail, ranging from RM118.41 per sq m to RM131.32 per sq m.”

In Selangor, Napic says the office rentals were generally stable with a monthly rental range of RM40 to RM50 per sq m, except for office spaces on the ground floor or level one in Damansara Uptown 1 and 2, ranging from RM107.85 per sq m to RM155.00 per sq m.

“Meanwhile, office space at the mezzanine floor of Sunway Pinnacle was tenanted at a monthly rental range of RM59.20 per sq m to RM102.26 per sq m, up by 8.8%.”