This article first appeared in City & Country, The Edge Malaysia Weekly on January 17, 2022 - January 23, 2022

The rental and occupancy levels of office space in KL city are expected to see further pressure following the recent completion of Plaza Conlay @ Conlay 301 Tower 1, which has a net lettable area of 606,000 sq ft. 

This comes amid the growing mismatch in supply and demand for office space as more organisations embrace the hybrid work model post-lockdown, says Knight Frank Malaysia executive director of corporate services Teh Young Khean in presenting The Edge/Knight Frank Kuala Lumpur and Selangor Office Monitor 3Q2021.

Nonetheless, Teh expects the occupancy levels in KL fringe to remain relatively stable for the rest of the year, supported by continued demand from micro and small companies (MSCs), and for high-quality decentralised office space, particularly in areas that have easy accessibility and good transport links.

Selangor will also see more ­leasing activity, especially for MSC-status and Grade A buildings aged less than five years. “With a covered link bridge to The Starling as well as a variety of in-building facilities, Imazium, a newly completed Grade A office building in Damansara Uptown, has garnered interest from occupiers looking to set up offices there,” says Teh.

“The Klang Valley office sector remains tenant-led. With the further easing of restrictions amid an improving Covid-19 situation, more tenants are gradually increasing office occupancy, allowing more staff to go back to the office but with stringent standard operating procedures (SOPs) and safety [measures] in place.”

Although more economic sectors and businesses are being allowed to reopen under Phase 4 of the National Recovery Plan (NRP), he believes it will take some time for the office market to go back to pre-pandemic levels as a number of companies, especially multinational corporations, are still evaluating their future workplace strategies. 

Teh observes that there have been more leasing enquiries from businesses related to e-commerce, hygiene and healthcare, insurance, technology, logistics, business process outsourcing, shared services as well as outsourcing, which will likely lead to a higher take-up of space going forward.

In addition, there was also a higher level of interest in the co-working segment, especially among companies that want to mitigate risks/commitments and business uncertainty. “The flexibility of co-working spaces enables these companies to control the required size of occupied space and length of tenancy term/period. They can scale up or down their workforce/occupied space, depending on the business needs and market conditions,” he explains.

“In the coming quarters, flexible office operations and the potential adoption of hybrid working models in the private sector are expected to significantly impact the office market. The demand/leasing enquiries for office space are also expected to slowly pick up following these developments.”

According to Teh, the average rental rates of office space in KL city, KL fringe and Selangor continued to decline in 3Q2021 owing to strict containment measures under Phase 1 of the NRP imposed last July.

“The office market remains favourable to tenants. In KL city, office occupancy continues to be under pressure amid a widening supply-demand gap and was lower during the quarter. In the fringe, it remained relatively stable with a marginal dip, supported by sustained demand for quality decentralised space,” he says.

According to Knight Frank data, the average rental rate for Prime A+ offices in KL city’s new central business district was down 2.8% quarter on quarter (q-o-q) to RM10.17 psf. The rate for the city’s Grade A offices also dropped q-o-q, with the new CBD down 1.4% to RM5.99 psf and old CBD down 2.2% to RM5.07.

In KL fringe, all areas saw a q-o-q decline in average rental rates for Grade A offices. Damansara Heights declined by 2.6% to RM5.26 psf; Taman Tun Dr Ismail (TTDI)/Mont’Kiara/Dutamas recorded the highest drop of 2.7% to RM5.04 psf; Mid Valley City (MVC)/KL Eco City (KLEC) dipped marginally to RM6.02; and Pantai/Bangsar decreased by 0.9% to RM5.61.

In Selangor, the average rental rates for Petaling Jaya, Subang Jaya and Cyberjaya declined marginally to RM4.38 psf (2Q2021: RM4.39), RM4.12 psf (2Q2021: RM4.17) and RM3.73 psf (2Q2021: RM3.79) respectively. Shah Alam remained unchanged at RM3.45 psf.

Meanwhile, the overall average occupancy rate in KL city dropped by 3.5% to 65.4%, as recently completed office buildings such as Permata Sapura, International Quarters @ TRX, Plaza Conlay @ Conlay 301 (Tower 1), and TS Law Tower have yet to achieve significant occupancies. New CBD and old CBD recorded a lower occupancy rate of 65.2% (3.1%) and 66.9% (5.6%) q-o-q respectively.

In KL fringe, the average occupancy rate recorded a slight dip of 0.2% to 85.7%. All areas saw a decline in occupancy rates, except Damansara Heights and Bangsar South/Kerinchi, which increased to 75.7% and remained the same at 91% respectively. Meanwhile, KL Sentral, TTDI/Mont’Kiara/Dutamas, MVC/KLEC and Pantai/Bangsar decreased to 92.4%, 77.6%, 78.4% and 86% respectively.

The overall occupancy rate in Selangor was lower at 74.4% in 3Q2021 compared with 75.5% in 2Q2021. Petaling Jaya, Shah Alam and Cyberjaya achieved occupancy rates of 73.3% (-2.5%), 80% (-0.2%) and 72.6% (-1.2%) respectively. However, occupancy rates in Subang Jaya were up by 0.5% to 78.9% q-o-q due to positive tenant movements at Wisma Consplant 2.

In 3Q2021, Kuala Lumpur registered a surge in net absorption of about 874,975 sq ft, mainly due to the commendable occupancy rates of selected newly completed office buildings such as Permata Sapura and International Quarters @ TRX. Selangor, too, recorded a positive net absorption of 135,969 sq ft during the period under review as the newly completed Imazium in Damansara Uptown achieved a commendable take-up.

The current estimated supply of office space in KL city is 58.86 million sq ft, followed by KL fringe with 29.43 million and Selangor with 24.36 million. This brings the total to 112.65 million sq ft.

There is a total of 10.38 million sq ft of office space under construction currently. KL city leads with 5.65 million sq ft, followed by KL fringe with 2.61 million and Selangor with 2.12 million. Knight Frank Malaysia projects an increase of 9.2% in office space over the next 2½ years.

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