According to Knight Frank in its real estate highlights report for the first half of 2024, the second half of the year is expected to add an additional 1.4 million sq ft of office space in the Klang Valley alone.
This, it stated, is on top of the 0.4 million sq ft of completed space during the first half of 2024, totalling 1.8 million sq ft for the year.
This follows the completion of more than three million sq ft in 2023. While the projected supply for 2024 is relatively lower compared to the previous year, competition within the existing stock may persist, particularly within Kuala Lumpur (KL) City, where a substantial portion of newly completed and incoming office spaces are concentrated.”
Rahim & Co International Sdn Bhd real estate agency chief executive officer Siva Shanker said the office market will remain challenging over the near term.
“On top of the existing supply, there are new buildings coming in, while older buildings are still fighting for tenants,” he told StarBiz.
Savills Malaysia Sdn Bhd group managing director Datuk Paul Khong said the new incoming supply will continue to heighten competition and cause older buildings to struggle (to get or retain tenants).
“As of the first half of the year, the office vacancy rate in Greater KL stands at 29.5%, thus reflecting a challenging position ahead.
“For the first half of the year, the net office absorption was at about 0.50 million sq ft (in Greater KL), pointing to ongoing demand as tenants carefully weigh their options and look for new and higher grade office spaces, moving forward.
With the current dynamics in the office market, Khong said office buyers still remain active in the market, adding however that transaction amounts have been generally smaller.
On a positive note, Knight Frank noted the Klang Valley office market continues to attract multinational corporations (MNCs) establishing regional hubs, as evidenced by recent office inaugurations.
“A recent Knight Frank study estimates Malaysia contributes roughly 8% to the Asia Pacific offshoring market, driven by competitive rental rates, a skilled talent pool, and strong government support for the digital economy.
“These factors are crucial for businesses seeking cost-effective and strategically located spaces to support their regional operations.”
Knight Frank added this trend is further supported by recent government initiatives such as tax incentives for the country’s designated International Financial Centre at the Tun Razak Exchange and the recent launch of the KL20 roadmap.
“Coupled with the announcement of 12 new international venture capital firms setting up offices in KL, these initiatives are expected to bolster interest and activity in the Klang Valley office market, potentially leading to increased investment and development in the sector.
“These efforts aim to position KL as a top global startup hub by 2030, which could drive further demand for high-quality office spaces.”
On the investment front, Knight Frank expects fewer transactions were recorded in the first half of the year, adding that this trend may continue.
“An earlier Knight Frank survey suggests a downward trend in investment sentiment for the Malaysian office sector in 2024, influenced by the shift towards hybrid working and the ongoing demand-supply imbalance.
“However, as market dynamics stabilise and demand for quality spaces strengthens, there may be potential for renewed investor confidence and activity.”
Meanwhile, down south in Johor, Olive Tree Property Consultants chief executive officer Samuel Tan said the office market has remained largely lacklustre.
“This is especially for the Johor Baru office market. It is due to oversupply of newly-built office space and also the closing down of companies during the pandemic.
“On average, the occupancy rate has dropped from 71.5% in 2020 to 66.1% in 2023. That is a drop of 5% within five years.”
Tan notes that although the occupancy rate for newer office towers have been improving post-Covid 19, he explains that this is largely due to the relocation of tenants from older buildings.
“It is a game of merry-go-round, rather than new demand,” he enthuses.
Knight Frank says it anticipates a wave of new supply could outpace current demand in the Johor office market.
“This abundance of space presents a double-edged sword.
“Companies looking for office spaces will have a wider selection of options, while landlords may face increased competition to fill their vacancies.
“Co-working spaces, though potentially competitive initially, may tighten overall office availability, ultimately benefiting traditional landlords by creating a more diverse and complementary office market. Nevertheless, we anticipate a steady rise in demand for office spaces over time.”
Flight-to-quality
In spite of the growing oversupply, Siva said there has been gradual demand for “flight-to-quality” office space, as corporate tenants continue to seek out higher-value assets.
“It is a trend now, as many are eyeing or relocating to Grade A or even Super Grade A office buildings.”
In light of the supply glut, Siva said landlords of these new, better quality buildings are also willing to offer competitive rates.
“As newer buildings fill up, older ones become empty. Yes, the rents of these older buildings may be lower, but they are also rundown.”
As such, he said these older buildings will need to reinvent themselves to remain competitive.
Over the years, there has been a growing trend of landlords converting their older buildings into high-end or budget hotels.
In 2006, the 13-storey Wisma Peladang in Jalan Bukit Bintang underwent a complete retrofit and became the Piccolo Hotel.
Other conversions over the years include Wisma KLH into Wolo Hotel, Magnum Plaza into Sky Express Hotel (formerly Flamingo Hotel) and Sentosa Hospital into Tune Hotel.
Siva noted the trend of converting older buildings into budget hotels “worked for a while.”
“After a while, there was an oversupply of these budget hotels as well.”
Moreover, Siva notes that the Covid-19 pandemic also had a disastrous impact on the hotel sector.
“We are seeing three types of trends when it comes to older office buildings. The first is to completely refurbish the entire building. Second, is to repurpose the building into something else.”
Before, it was the budget hotels phenomena. As of late, Siva said several of these older buildings have been repurposed into quasi data centres.
“These are buildings with racks and racks of servers. We have also seen buildings repurposed to offer ambulatory (healthcare) services.
“The third alternative (for landlords) is to not do anything with their older buildings – and watch it slowly empty out.”
Khong said tenant retention is a major ongoing problem in older buildings, especially if nothing is done.
“It is still a tenants’ market now and they are shopping for good locations, high-end addresses and offices and are reviewing the best offerings.
“At the same time, new landlords are working hard to fill up their buildings as well.”
Cautiously optimistic
Despite the challenging office market situation currently, Khong remains cautiously optimistic of the sector’s future prospects, especially within Greater KL.
“Demand is expected to continue, but driven by tenants rightsizing to accommodate hybrid work models and also prioritising environmental, social and governance (ESG) considerations.
“Our (Savills Group) office is also heading to the new Pavilion Damansara Heights offices in the fourth quarter of this year, with the above considerations clearly in mind.”
Khong adds that high-grade offices are likely to see increased demand due to their advantages, including green certifications, Malaysia Digital Status, prominent locations near amenities and a shopping mall, public transport and superior facilities.”
Siva notes that office buildings in integrated developments have been doing better than standalone ones.
“Office buildings in locations such as Midvalley and Bangsar South have been doing well,” he said.
Meanwhile, in Johor, Olive Tree Property Consultants executive director Tan Wee Tiam said demand for office space should improve, going forward.
“The forthcoming Johor-Singapore Special Economic Zone (SEZ) should gradually attract more Singapore firms or foreign companies based in Singapore to start a representative or regional office to explore new opportunities.
“The occupancy rate should pick up as the government discloses more details on the SEZ and Special Financial Zone.
Additionally, with the influx of new foreign investments, Wee Tiam said there will be new demand from investors, consultants and suppliers.
“The corporate offices that are likely in demand would be those that are ESG-compliant with more stringent specifications of green features to save energy.
“Big organisations, especially MNCs, are likely looking for such features as they are bound by their headquarters’ guidelines.”
Wee Tiam said buildings with high-speed internet connection, ample carparks, good sound-proof, lifts with fast speed and larger capacity will be some of the key common requirements.
