THE office market went through a significant change after Covid-19 struck in 2019, leading to the popularity and growth of flexible offices, or famously known as co-working spaces.
Its growth was further supported by its cost-effectiveness as well as popularity among startups and multinational corporations or MNCs opting to diversify into Malaysia.
However, stepping into 2024, the cost of doing business is getting higher and more and more companies are starting to pull back their work-from-home flexibility option with employees now required to work from the office five days a week.
This raises the question of what lies ahead for the co-working industry in Malaysia.
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Market saturation
According to Knight Frank Malaysian Real Estate Highlights for the second half of 2023 (2H23), the Klang Valley has a cumulative supply of office space of approximately 117.7 million sq ft.
With such numbers existing within the office space segment, the next question that arises is whether co-working players are encountering market saturation.
Sharing their views with StarBizWeek, three experts unanimously agree that the co-working market is less likely to be saturated.
Knight Frank executive director of office strategy and solutions Teh Young Khean says currently, there’s a minimum of 30 notable players within the industry spanning from the Klang Valley to Penang as well as Johor Baru.
“Despite this presence, the market is far from saturated in our view, as the total take-up rate of space accounts for less than 2% of the total office stock,” he says.
Instead, Teh is of the opinion that the high supply of office space will present a beneficial scenario for co-working players as well as landlords.
He says motivated landlords in areas such as KL City are more inclined to negotiate better deals with co-working players, providing them with more favourable terms and opportunities to expand their operations.
“However, caution is warranted that new locations should align with demand and meet stringent criteria to capitalise on the benefits of the office glut effectively,” he adds.
WORQ co-founder and chief executive officer (CEO) Stephanie Ping also supports this view, as she states that due to limited large-scale co-working players, the market in Malaysia is not seen as saturated.
Instead, she says businesses that opt to expand their operations to Malaysia would most probably find the country having limited options in co-working services in contrast to other countries.
“This may result in them choosing other countries for expansion that will match their needs.
“So, I believe that each player in the market has their own unique selling points and strength,” she adds.
Ping also agrees that the glut presents an opportunity for co-working operators, as she gives an example where WORQ itself has been able to benefit from it.
“By partnering with landlords such as UOA Group and Sunway, we have quickly filled our co-working space within two months of launching, demonstrating robust demand for non-traditional office leases.
“This strategy not only benefits landlords by generating higher rental yields, but also places minimal operational burdens on them,” she says.
Paramount Corp Bhd
deputy CEO and Paramount Coworking Sdn Bhd director Benjamin Teo Jong Hian, on the other hand, believes that the “so-called glut” is an overstatement and not reflective of the entire office landscape, especially in the fringes of KL City.
Citing its operations in Co-Labs Coworking, located mainly on the fringes of KL City, he believes that demand for office space within these areas has always been strong.
Teo proceeds to say that the co-working space is still growing, and now, more demand is starting to be driven by larger businesses like MNCs.
“As long as the economy grows, there will always be demand for office space,” he says.
Challenges remain
Before a rainbow appears, there will always be rain. The same goes for success, there will always be challenges preceding it.
Teh says among potential challenges that the co-working industry faces is related to collaborations with landlords.
“The partnership lease or management model is becoming increasingly competitive as landlords compare returns, which potentially leads players to take on greater risk,” he explains.
That being said, he suggests that co-working players place more emphasis on improving existing centres to enhance profitability and instill confidence in landlords while attracting external investors.
Additionally, Teh says expanding their footprint and opening more locations would provide clients with more options, as well as increasing market presence.
“However, given capital constraints, players need to be prudent in their expansion strategies, often resorting to leasing partnership models with landlords.
“These partnerships can take various forms, ranging from pure management agreements to profit-sharing arrangements, enabling operators to expand their centres and locations more efficiently,” he adds.
Rising rentals
Rental cost is another major aspect that co-working players must keep an eye on.
According to Knight Frank’s report, the monthly average rental rate in KL City is RM6.48 per sq ft, while KL Fringe and Selangor rates are RM5.73 per sq ft and RM4.16 per sq ft, respectively.
This is a 1.25%, 1.06% and 0.48% year-on-year (y-o-y) increase from RM6.40 per sq ft, RM5.67 per sq ft and RM4.14 per sq ft, respectively, recorded during the early half of 2023.
Meanwhile, JLL’s Property Market Monitor Report forecasts that monthly achievable gross rents for the years 2024 until 2026 would range between RM6.60 per sq ft and RM7.20 per sq ft for KL City and RM6.10 per sq ft and RM6.70 per sq ft for KL Fringe.
Ping states that the hike in rental rates is driven by increasing demand for higher-quality buildings that offer green features and enhanced amenities.
This is evident as JLL reports that rent for green spaces has experienced faster growth compared to the overall market.
In fact, JLL shares that the expected green-certified office space is mostly at par or even at the same net lettable area as the expected new office supply coming in.
She believes the rental market will remain relatively stable following the increase in rates in high-demand areas.
The stable rental landscape, coupled with existing high vacancies, would then present another significant opportunity for co-working players, says Ping.
“They can capitalise on this by converting traditional office space into modern co-working environments, thus meeting the growing demand for flexible and convenient workspace options.
“This trend is likely to support the expansion of co-working spaces in the region,” she says.
She adds that once co-working players are able to further improve their services and offering, they can consequently charge higher rates, leading to greater yields that will benefit both the players as well as landlords.
Teh also agrees that players can expect an uptrend in rate revisions for their traditional leases. This follows landlords’ anticipation of a much steadier and higher yield in the medium to long-term timeframe.
He says as of now, the current rental yield in the Klang Valley office market is estimated to range around 5% to 7%.
“We are expecting it to remain stable in the near future, and the stability would assist the co-working players in managing the financial return metrics expectation from building owners,” he adds.
“The reality is the cost of running a business has gone up. Rental rates have gone up, and we ourselves pay rent to our landlords. Utility charges and people costs have also gone up,” Teo says.
However, despite the price hikes, he stays strong in his stance of the co-working space continuing to have bullish demand moving forward.
Bright outlook
With that being said, Teh believes 2024 is anticipated to be the year of growth for many co-working players, driven by intensified efforts to meet escalating demand.
He states that the exponential rise of co-working space observed in 2018 and 2019 has already given way to a more stable and cautious rate of growth.
With about a 2% market share in the total office supply, he says co-working spaces have positioned themselves as a “valuable complement” to occupiers within a building.
“The demand for co-working space remains robust and vigorous, as it caters to a diverse spectrum of needs ranging from small businesses to MNCs.
“This trajectory shows no sign of abating in the foreseeable future, suggesting a sustained momentum in the co-working industry in the years ahead,” he says.
Additionally, Teh states that despite companies transitioning back to a return-to-office (RTO) policy, he believes that hybrid working arrangements will continue to be practised.
“With more office occupiers navigating their medium to long-term office footprint strategies, they may opt for more flexible solutions provided by co-working,” he adds.
Ping also agrees on this bullish view as demand continues to surge in Malaysia and even worldwide.
Quoting market surveys from JLL and CBRE, Ping shares that these two independent market researchers anticipate an increase in market share of 20% to 30% by 2030, globally.
“This growth is evident as 10% to 20% of office leasing demand now opts for flexible offices, surpassing available supply,” she says.
Additionally, touching on the subject of MNCs planting their offices in Malaysia, Ping believes this trend will continue in the medium term, provided that Malaysia maintains a stable business environment and remains open to global business.
A domino effect will then take effect, and co-working spaces will equally enjoy the benefits of such businesses coming to Malaysia, she says.
“And once these companies settle down, they may then evaluate the appropriate mix of co-working and traditional office spaces tailored to their expansion needs,” she adds.
Teo shares the same thoughts as the others, whereby demand for co-working space will continue to be consistent.
He tells StarBizWeek that the demand from corporates and MNCs that are projected to grow will supplement the demand from smaller businesses.
“While previously, co-working attracted smaller companies like startups, today, with everyone adopting a more flexible approach to work, corporates including MNCs see great value in a more flexible turnkey approach to meeting their office space requirements,” he says.
Furthermore, with companies re-imagining their office space needs post-Covid, Teo suggests that industry players have to now work effectively to meet these needs and considerations well.
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