Office Space Supply Expected to Increase

Working from home (WFH) has become the new standard in the wake of the epidemic, and physical office space has taken a step back. However, as people worldwide became accustomed to life with Covid-19, the value of having an office became a point of contention.

In its spotlight on Kuala Lumpur office space for the second half of 2021, Savills Malaysia predicts a spike in supply over the next two years.

 

More office space

By 2023, new office completions in Greater Kuala Lumpur are expected to total 9.9 million sq ft, representing a 7% increase over current levels, with Kuala Lumpur accounting for 84% or 8.3 million sq ft.

According to Savills Malaysia, the office market in Greater Kuala Lumpur had a cumulative supply of approximately 136 million sq ft by the end of the third quarter of 2021, with Kuala Lumpur accounting for 67% of that total (91.7 million sq ft).

This marks a 2.1% year-to-date increase, with a 4.4% growth forecast to close the year as more offices are built by the end of 2021. Savills Malaysia also said nine new office completions were registered in Greater Kuala Lumpur in the first nine months of 2021.

Six of the buildings are in Kuala Lumpur, namely:

• Menara Permata Sapura KLCC,

• TSLaw Tower,

• Menara Legasi,

• Plaza Conlay,

• Menara Great Eastern 2, and

• The Five @ Kompleks Pejabat Damansara.

These are the three new office buildings outside of Kuala Lumpur city centre: 

• Q Tower, 

• Quill 9 Annexe, and 

• Imazium @ Damansara Uptown

Overall vacancy for Grade A offices in Greater Kuala Lumpur averaged 26.4% in the third quarter of 2021, with no changes from the previous year.

In comparison, due to supply growth, the vacancy rate for Grade A offices in Kuala Lumpur increased slightly to 25.5% (2020: 25.1%), equating to available space for rent of 10.5 million sq ft. 

Of the newly completed space of 2.75 million sq ft in Greater Kuala Lumpur, Menara Permata Sapura KLCC and Imazium @ Damansara Uptown were among the new buildings reported to be over 50% occupied.

 

What caused the rise in vacancies?

According to Savills Malaysia, the increase in vacancies is due to company relocation and downsizing, as well as a review of space usage efficiency.

For example, British Telecom (BT) reduced their commercial activity at Menara BT from seven to only four levels, a 40% reduction in the previously occupied space of 67,000 sq ft.

Savills Malaysia predicted vacancy in Greater Kuala Lumpur to continue to climb in the coming months, given the significant number of approaching new completions and the current poor absorption rate.

The increase in office space vacancies is due to company relocation and downsizing, as well as a review of space usage efficiency.

On the rental side

Savills Malaysia also reported that prime office rents in Kuala Lumpur remained stable at RM8.50 per sq ft per month in the third quarter of 2021, compared to the same period in 2020.

The asking rent for all grade offices in Kuala Lumpur increased by 0.7% to RM5.80 per sq ft per month. This was due to increasing asking rents for some better-located office buildings in Kuala Lumpur's city centre and suburbs.

Savills Malaysia said the weak sentiment is limiting rental growth prospects since more tenants want landlords to offer incentives.

It also noticed that some new office buildings are offering longer rent-free periods and fit-out assistance to lure new tenants over a long lease term, further reducing office landlords' returns."

 

WFH accelerating digitalisation in Malaysia

According to a recent analysis by UOB Kay Hian, the pandemic has caused businesses to embrace WFH policies, which hastens the digitisation process.

As a result, the office space may need to be remodelled in terms of practicality and aesthetics to attract and maintain tenants. But, more crucially, it's to improve health and safety procedures.

The research firm also claims that rents are still being squeezed due to oversupply. Oversupply is a worry in the office market just as it is in retail, with average rental rates in the Kuala Lumpur city centre being under pressure at RM7.09 per sq ft.

During the pandemic, the office category has performed better than the retail section. Earnings were driven by stable occupancy rates and decreasing operating expenses, particularly for the office real estate investment trusts (REITs) under its coverage.

While the industry is still dealing with oversupply, the firm believes that certain office REITs positioned in strategic areas with adequate connectivity, such as KL Sentral, would profit from increased demand for office space amid the need for physical separation.

 

What employees desire

According to Savills Malaysia deputy managing director Nabeel Hussain, the physical office is still critical in businesses' recovery and ensuring a quick return to normalcy.

Given that the hybrid working model appears to be here to stay, striking a careful balance between business and economic needs, as well as employee preferences, is the perfect option; and that's what companies should be concentrating on during this reopening phase.

In addition to the physical office setting, other variables are likely to be needed to make returning to work in the existing environment more appealing.

Solid hardware and software solutions, according to Nabeel, will become more critical than ever in supporting the growing work environment.

In a recent independent survey, Savills Research found that 81% of Malaysian workers desire to return to the workplace because they believe it will help them be more productive, creative and advance their careers.

 

According to Savills Research, employees want to feel safe in the office as they return and are concerned about safety, security, and, most crucially, hygiene.

Amenities in and around the workplace, such as cafes/restaurants, gyms, retail and leisure facilities, as well as elements such as greeneries and open spaces, enhance the office experience for Malaysian workers. Adequate lighting and air quality are also important considerations.

 

Source: The Star