The evolution of office space

This article first appeared in City & Country, The Edge Malaysia Weekly, on April 15, 2019 - April 21, 2019.
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Row after row of seemingly endless cubicles with paper and folders piling high — this is the typical office space we are familiar with. Even with computers and the internet replacing the stationery, the work culture and office use have not changed much. Hence, the terms “shared work space”, “working outside the office” and “fun work space” emerged only recently.

Technological advancements allow professionals to work via mobile devices, such as laptops, tablets and smartphones, as long as there is internet connection, JLL Malaysia managing director Y Y Lau says.

According to CBRE | WTW managing director Foo Gee Jen, digital platforms have reduced face-to-face interactions, so the requirement for customer service space for transactions is less. As traditional printed materials are no longer stored physically but digitally, the need for storage space is also reduced.

“In fact, face-to-face interactions among workers have also been reduced with the current trend of employing freelancers, contract workers and part-timers as well as the introduction of flexible working hours. This is enabled partly IT and partly modern working concepts,” he says.

In view of that, flexible office space is gaining popularity. As Malaysia continues to support small and medium enterprises (SMEs), coupled with the technology revolution that led to the establishment of many new start-ups, the use of flexible or transitional office space is a good option.

“Some SMEs may face financial challenges in the beginning and some may require more flexible and smaller workspace than what traditional offices offer. In addition, some large corporations that have started new projects may require a new team. But as these projects may not be for long durations, the use of transitional office space can be a solution,” says Lau.

The fast-growing flexible office market and the expectations of millennials — flexibility, experience, recognition, positive impact and social purpose — are prompting landlords and companies to rethink the use of their workspace.

LaurelCap Sdn Bhd head of capital markets Lou Minn Yian says companies with offices in the KL city centre have been moving to the suburbs over the past 10 years. “Generally, this is to reduce costs and shorten the travel time of their workers from their homes to the office.”

 

Changes in office requirements

As the country develops, tenants’ selection of locations and types of office space changes as well. Connectivity and accessibility to highways and public transport have become top priorities, property experts say.

“As the number of motor vehicles increases, public transport services in the city centre have also improved or expanded. Tenants’ demand for connectivity continues and is not expected to lessen in the future,” says JLL’s Lau.

Another thing tenants are seeking in buildings is “green” features.

“Tenants would prefer environment-friendly buildings because it could be part of their corporate social responsibility. In addition, they get to enjoy tax incentives,” says Foo.

“They have wellness and retention of their staff in mind when occupying green buildings located in areas with good connectivity. They know the younger generation is getting more aware of environmental matters,” says Lau.

She also notes that tenants with a large workforce are concerned about attracting talent. “Modern concepts and fit-outs are also important. People are getting sensitive to the features of flexible workspace.

“An increasing number of companies are also looking at staff development. So, some tenants would prefer to rent space where their workers can study, discuss and acquire knowledge and new skills, as opposed to space that merely serves the company.”

LaurelCap’s Lou concurs, adding that millennials are seeking a more relax working environment resembling that of the “Google workspace” concept.

Foo says rent is still the primary consideration for tenants. “They will still look forward to rental rates that are justifiable to their capital expenditure.”

He notes that tenants also look for buildings with multimedia super corridor status. “Technology and digital infrastructure such as high-speed internet are needed to support tech content in operations.”

Foo and Lou observe that amenities and facilities such as parking space, security and food and beverage convenience are also on tenants’ lists of requirements.

“With the emergence of prestigious office buildings around Kuala Lumpur, there has been an reciprocal demand for such offerings. Tenants would emphasise the need for a prime address and security such as customised individual access, as well as commercial offerings such as food and beverage outlets in and around the building,” says Foo.

 

Flexible workspaces

Flexible workspace is getting more popular in Malaysia as multinational corporations, SMEs and entrepreneurs are turning their attention to them.

JLL’s Lau says the good thing about flexible office space is that the tenures are shorter

compared with traditional offices. Hence, new companies will not have to allocate huge sums for capital expenditure and fit-out costs when they commence business.

In addition, as opposed to traditional offices that merely offer a typical workplace, flexible office space tends to provide better amenities and facilities such as comfortable fittings, furniture, rooms and equipment.

Although flexible workspace is preferred, property experts opine that this trend is not affecting the office market. Instead, it complements the market, targeting a specific work demographic.

According to Foo, co-working space makes up less than 1% of the total office space in the Klang Valley and it is fragmented with many small-scale operations and several established co-working chains.

“However, the prospect of co-working space is bright as we estimate that supply has grown close to 84% since 2010. We expect this upward trend to continue as local and international co-working brands are still expanding in the country,” he says.

Lau says co-working space is filling the gap in the office market providing flexibility for users in terms of the size of the space and tenure.

However, she says flexible workspace may compete directly with traditional office space in the future as more large companies occupy such desks.

LaurelCap’s Lou says co-working space is hugely based on social and community engagement. “But I do see it as a threat to the service office business, especially in an environment where the economy is not faring well and everybody is on an austerity drive.”

The original target market for flexible workspace is SMEs and start-ups, which, according to Foo, constitute about 75% of the demand.

However, property experts observe that big companies and MNCs are opting for such space as well.

“Nowadays, companies are looking at the wellness of their workforce. They want workspace that can enhance productivity,” says Lau.

According to a study JLL Asia-Pacific, what initially started as a platform for freelancers and start-ups is now firmly on the radar of large corporates. To cater for demand, flexible space providers have started tailoring their offerings to accommodate corporate users.

“One of the more appealing aspects of co-working space is the ‘pay when use’ feature,” says Lou. “The environment is usually posh and chic, with business and recreational facilities to entice millennials.”

Lau says more and more people and companies are looking at flexible workspace. “Competitive cost is not a compelling reason for choosing a flexible space. It’s about opportunities and talent.”

Lou says companies with a huge workforce will still opt for traditional offices if they have plans to use the premises for a long period. “Co-working space is more suited to start-ups or SMEs with limited funds and looking for a conducive environment to operate from.”

CBRE | WTW’s Foo says Malaysia is still a popular destination for MNCs to set up offices to provide support services in Southeast Asia. “This factor will continue to ensure demand for traditional office space in the short to medium term.”

 

Location of flexible workspace

Based on JLL’s data, as at 3Q2018, there was 250,338 sq ft of flexible workspace in KL city centre. In its fringe and the decentralised areas, there was 244,593 sq ft and 126,100 sq ft respectively. Cyberjaya had 9,000 sq ft.

From 2019 to 2023, the incoming supply of flexible workspace in KL city centre and its fringe will be 130,000 sq ft and 80,130 sq ft respectively. The decentralised areas will have 32,000 sq ft.

The number of flexible space operators is growing at a fast pace of 15% per annum in Greater KL. This is based on figures provided the main flexible space operators in Greater KL identified JLL in 3Q2018, which include Arcc Offices, Centennial, CEO Suite, Colony, Common Ground, H Space, Regus, Servcorp, The Co., Whitespace and WORQ.

According to Foo’s research, about 60% of existing co-working space is in non-purpose-built offices (PBOs) and the rest in PBOs.

“Currently, co-working space is mostly in shopoffices and retail centres ... leveraging lower rental cost. Co-working operators who emphasise themes and concepts would establish themselves in heritage buildings such as pre-war shops. But having said that, co-working space is increasingly available in PBOs and the operators usually take up a few floors,” he says.

He estimates that in a few years’ time, 80% of the upcoming co-working space will be in PBOs. “In fact, some PBOs are incorporating co-working space as a strategic asset enhancement measure while some older office buildings could do the same for space re-adaptation to stay relevant.”

On the possibility of flexible workspace replacing traditional workspace, Lou opines that this is unlikely to happen as corporations still need their individual identity, which co-working space cannot provide.

However, she says flexible workspace is a disruption to the traditional workspace. “Co-working space is mainly catered for the start-ups, SMEs and individual proprietors in a ‘gig economy’ where the setting-up cost of an office in the city centre is expensive. In addition, for most flexible workspace, the concept of social and community-based philosophy is greatly emphasised in the ecosystem.”

Lau says flexible workspace is not a passing fad. “Flexible space operators are becoming increasingly active in the leasing market and demand is projected to rise.”

According to JLL Asia-Pacific Research, 30% of corporate commercial property portfolios could be made up of flexible workspace 2030.

 

The future of office workspace

Moving forward, property experts believe that the office market will continue to evolve to suit the needs of companies.

JLL’s Lau foresees the market consolidating as traditional and flexible workspace complements each other. “There will always be a demand for both types of workspace as different companies have different needs.

“Traditional office space will have to adjust to cater for the evolving needs, especially with the incoming supply. But tenants may want to upgrade to newer buildings that offer better deals and incentives.”

LaurelCap’s Lou expects changes in the concept and design of workspace to happen over time. “The next generation forming the bulk of the workforce is the millennials, and their style of working is online-based rather than in a cubicle. Thus, I foresee the office space becoming more flexible in terms of culture. In terms of design, it will be spaced out with many business and recreational facilities. Convenience will take centre stage ... access to F&B outlets and public transport.”

CBRE | WTW’s Foo, on the other hand, says there could be more decentralisation of offices away from KL city centre as rail networks improve connectivity.

With the property market facing challenging times in recent years, diversification has become a strategy, he notes. “More office space could emerge from integrated developments or even modern industrial parks as alternatives to PBOs.

“As for building features, owners of office buildings could continue to innovate to provide more efficient and self-sufficient space.”

 

Office glut continues

The oversupply of office space in the Klang Valley continues unabated and property experts opine that it will take some time for demand to catch up.

According to CBRE | WTW managing director Foo Gee Jen, 14.91 million sq ft or 24 purpose-built offices (PBOs) are expected to enter the market the end of 2021. About 87% of these offices are located in Kuala Lumpur.

Real estate services company JLL’s data shows that in the next five years, KL will receive most of the incoming supply of office space, totalling 10 million sq ft.

The fringes of the city will see an additional 1.1 million sq ft while more than 3.2 million sq ft is expected to be unveiled in the decentralised areas.

Among the upcoming office buildings are The Exchange 106 @ TRX (net lettable area: 2.6 million sq ft), Menara Prudential (NLA: 413,000 sq ft), Warisan Merdeka @ PNB 118 (NLA: 1.7 million sq ft), CitiTower (NLA: 1.72 million sq ft), MBSB (Malaysia Building Society Bhd) Tower (NLA: 280,000 sq ft) and Tropicana Gardens (NLA: 150,000 sq ft).

“The surge in supply will put pressure on occupancy and rental rates. Given that the business environment is generally soft and the oil and gas industry is still recovering, the concern would be on the lack of new demand,” says Foo.

JLL Malaysia managing director Y Y Lau says there is not much difference between the rental rates of old office buildings and newer ones (excluding premium buildings) in Greater KL. As at 4Q2018, old office buildings were fetching RM3 to RM8.50 psf and the newer ones, RM3 to RM8 psf.

“Rather than the age of the buildings, it has to do with how well they are managed and maintained that allows landlords to ask for higher rents. Additionally, buildings with good spec will likely be taken up with high rents even if they are not located in the city centre, like Nucleus Tower in Petaling Jaya, which registered an occupancy of more than 35% in just five months,” she says.

CBRE | WTW data shows that the average rent for prime PBOs in KL is between RM6.50 and RM7 psf while non-prime PBOs is between RM4 and RM4.50 psf.

LaurelCap Sdn Bhd head of capital markets Lou Minn Yian says based on Valuation and Property Services Department’s data, rents in the Klang Valley have been increasing gradually.

“Nevertheless, there are some office buildings in the city centre that have reduced their rents to attract tenants in this trying time,” she adds.

Lau concurs, adding that rents have risen an average of 2% over the past five years in Greater KL for a basket of prime office buildings that JLL monitors.

“All three submarkets registered an increase in rental rates. More specifically, the KL fringe registered the highest growth of 7%, reaching RM6.40 psf per month last year, followed the decentralised area with an increase of 4% from 2014 to last year. KL city saw an increase of only 1%,” she says.