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PHYSICAL office space literally took a step back over the last couple of years, as working from home (WFH) became the new norm amidst the pandemic.
However, as people around the world started getting used to life with Covid-19, the importance of having an office has become a hot debate.
Savills Malaysia, in its spotlight on Kuala Lumpur office space for the second half of 2021, says supply is expected to surge in the next two years.
“Expected new office completions in Greater Kuala Lumpur will amount to 9.9 million sq ft by 2023, representing a further supply growth of 7% from existing levels, of which Kuala Lumpur accounts for 84% or approximately 8.3 million sq ft.”
Savills Malaysia says the office market in Greater Kuala Lumpur reached a cumulative supply of over 136 million sq ft at the end of the third quarter of 2021, of which 67% is located in Kuala Lumpur (91.7 million sq ft).
“This represents a year-to-date growth of 2.1% and is expected to close the year at 4.4% growth, as more offices are completed by the end of 2021.”
According to Savills Malaysia, nine new office completions were recorded in the first nine months of 2021 in Greater Kuala Lumpur.
“Six of the buildings are in Kuala Lumpur, namely Menara Legasi, Menara Permata Sapura KLCC, TSLaw Tower, The Five @ Kompleks Pejabat Damansara, Plaza Conlay and Menara Great Eastern 2, amounting to 2.06 million sq ft.
“Outside of Kuala Lumpur city centre, there were three new office buildings, namely, Q Tower, Imazium @ Damansara Uptown and Quill 9 Annexe, accounting for 0.69 million sq ft.”
Additionally, Savills Malaysia says total vacancy for Grade A offices in Greater Kuala Lumpur averaged at 26.4% in the third quarter of 2021 and showed no changes from 2020.
“In comparison, the vacancy rate for Grade A offices in Kuala Lumpur increased slightly to 25.5% (2020: 25.1%) due to supply growth, 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.”
Savills Malaysia says the rise in vacancy is also attributed to the relocation and downsizing of companies reviewing their space use efficiency.
“For instance, British Telecom (BT) downsized their business operation from seven to only four levels at Menara BT, equivalent to a 40% reduction in the formerly occupied area of 67,000 sq ft.
“In view of the large impending new completions and the current low absorption rate, we expect vacancy in Greater Kuala Lumpur to continue to rise in the coming months.”
On the rental side, Savills Malaysia says prime office rents in Kuala Lumpur remained constant at RM8.50 per sq ft per month in the third quarter of 2021, as compared with 2020.
During the same comparative periods, Savills Malaysia says that asking rent for all grade offices in Kuala Lumpur rose marginally by 0.7% to RM5.80 per sq ft per month.
“This was due to the increase in asking rents for some better-located office buildings in the Kuala Lumpur city centre and Kuala Lumpur suburban areas.”
However, Savills Malaysia says the current weak sentiment is limiting rental growth potential, with more tenants expecting landlords to offer incentives.
“We also observe that some new office buildings are offering more extended rent-free periods and fit-out assistance (in certain situations) to attract new tenants over a long lease term, further diluting returns for office landlords.”
Meanwhile, UOB Kay Hian in a recent report notes that the pandemic has forced businesses to implement WFH policies, thus accelerating digitalisation.
“Hence, the office space could have a makeover in terms of functionality and aesthetics to attract and retain tenants. But more importantly, it is also to strengthen health and safety protocols.”
Additionally, the research house says oversupply is still squeezing rents.
“Just like retail, oversupply is also a concern in the office segment, with average rental rates in the Kuala Lumpur city centre remaining under pressure at RM7.09 per sq ft.”
Citing Knight Frank, UOB Kay Hian says 11 office buildings are slated for completion in the Klang Valley by the end of this year.
The research house says this will add about five million sq ft or 4.5% of space to the existing office market.
“This could lead to depressed rental rates as supply outstrips demand.”
In spite of this, UOB Kay Hian says that offices in strategic locations have remained resilient and will likely continue to do well.
“The office segment has been performing better than the retail segment during the pandemic. Particularly for the office real estate investment trusts (REITs), under our coverage, earnings were driven by stable occupancy rates and lower operating expenses.
“Although the industry is still grappling with oversupply, we believe selected office REITs (located in strategic locations with good connectivity, like KL Sentral) will benefit from higher demand for office space amid the need for physical distancing.”
Savills Malaysia meanwhile notes that the prolonged restrictions and imposition of the movement control orders over the last couple of years had significantly impacted the Malaysian economy.
“Malaysia’s economy is on track for recovery, premised on reopening all economic sectors and resuming most social activities.
“Businesses are hoping for high vaccination levels to support the recovery. As at November 2021, Malaysia has fully vaccinated nearly 25 million or 77% of its population.”
Savills Malaysia does point out that various concerns over the future of the workplace have led to an uncertain demand outlook.
“However, our local survey regarding the needs and preferences of office workers indicates that the physical office is still necessary.
“The result shows that 81% of Malaysian office workers see the physical office as remaining important either always or at least for the short term.”
Additionally, Savills Malaysia says most workers will not resist returning to the office, as they believe the workplace will benefit their physical and mental health, as well as support their professional and personal development.
“Indeed, we expect to see more companies reactivate their expansion and relocation plans in the coming months.”What workers want
Savills Malaysia deputy managing director Nabeel Hussain says the physical office remains vital in businesses’ recovery and in ensuring an expedited return to normalcy.
“Seeing that the hybrid working model appears to be here to stay, a delicate balance between business and economic needs and employee preferences is the ideal solution; and that’s what companies should be focusing on during this reopening period.
“The physical office environment likely needs to be enhanced by other factors to make the return to the workplace in the current environment more attractive.”
Nabeel says the presence of solid hardware and software solutions will take on greater importance than ever and is key to supporting the evolving work environment.
Savills Research, in an independent survey conducted recently, revealed that 81% of Malaysian workers want to return to an office environment as they consider it for productivity, creativity and for career growth.
“However, hybrid working arrangement has become the preferred model and is likely to remain so,” the survey says.
As workers return, Savills Research says employees want to feel safe in the office, as they are concerned with factors such as safety, security and most importantly, attention to hygiene.
“For workers in Malaysia, the office experience is enhanced by amenities in and around the workplace such as cafes / restaurants, gym, retail and leisure facilities, as well as factors such as greeneries and open spaces.
“Adequate lighting and air quality are also key elements.”