PETALING JAYA (Sept 14): It may be challenging for older office buildings in the Klang Valley, which have been left vacant as their owners or tenants move to newer developments, to be filled up, as more new office buildings spring up and more companies move out of the older buildings, said experts in the property sector.

The latest among these relocations is Malayan Banking Bhd (Maybank), which announced plans to move its head office to Merdeka 118 in 2025, the world's second tallest building owned by the bank's 40% shareholder Permodalan Nasional Bhd (PNB).

"Relocation will benefit new developments but will not reduce the overall vacancy rate, which may rise to 20% to 22% upon the recent completion of a few mega projects with more developments scheduled for completion soon," said CBRE WTW Valuation & Advisory Sdn Bhd group managing director Tan Ka Leong.

Looking at the incoming office space supply in the pipeline, Tan said oversupply situation may persist and could worsen as other ageing buildings are unable to provide the latest office requirements like availability of high-speed internet, environment-friendly features, more natural ventilation and lighting.

"Some of the old buildings in KL which were completed in the 90s and 80s are observed to have occupancies of less than 50%. It will not be easy to find new tenants for the older buildings without some major capital investments in office upgrading. Whether the financial costs will be justified by the risks involved are the difficult questions faced by current office building owners," he said.

Nonetheless, Tan said older buildings in "very central" locations can be very attractive if retrofitted to meet the special needs of smaller enterprises, as well as companies seeking greater flexibility and scalability.

The 35-year-old Menara Maybank, for one, appears to have an advantage over its peers of older buildings in terms of securing tenants as it is deemed to be well maintained, while having a strategic prime location in the city centre and potentially competitive rental rates if office space supply remains abundant two years down the road.

"Office buildings in prime locations can attract tenants although the quality of the tenants may not be first-tier companies," said KGV International Property Consultants executive director Anthony Chua.

"For Menara Maybank, which is not only located in a strategic location but is [also] a well-maintained building despite its age, the possibility of attracting tenants into a building associated with the brand and reputation of the bank cannot be discounted," he said.

Including Maybank's tenancy, which involves taking up 650,423 square feet or 40% of office space in Merdeka 118, 70% of the building will be occupied once it is completed by the end of this year, PNB's chief executive officer Ahmad Zulqarnain Onn said during the signing of the tenancy and lease agreement between Maybank and PNB on Monday (Sept 12).

The Merdeka 118, which is also the tallest building in Southeast Asia and East Asia, has 1.6 million square feet of net lettable area. Luxury hotel brand Park Hyatt will be taking the upper 17 floors of the building, which will become the brand's first property in Malaysia.

As a result of the group's relocation of its headquarters to Merdeka 118, Menara Maybank, a 55-storey purpose-built office building with 1.09 million square feet of space, will become largely vacant.

Although the lure of a brand-new skyscraper is understandable, some prefer different types of offices and do not necessarily prefer new buildings, said YY Lau, country head of JLL Property Services (Malaysia) Sdn Bhd.

"Many older offices will continue to command healthy demand. This is especially [so] if they have competitive rental rates, in a good location with good amenities, or fulfil certain standards such as sustainability. Of course, upkeep, facilities, and other factors should not be neglected," she explained.

Lau also noticed that market activity has been slowly picking up as rental rates remain attractive.

"We expect net absorption to improve as the economy picks up," she said, adding that certain areas within the Klang Valley have seen slight increases in rental rates, especially for good-performing buildings in strategic locations. Net absorption is the difference between the commercial spaces vacated and the spaces taken up.

Nonetheless, Lau acknowledged that some older buildings will indeed face challenges in today's market especially when certain features are outdated, such as inadequate car park and obsolete fire safety adherence.

KGV's Chua, however, said the office market is still fragile and lacks strong economic impetus.

"The office market is trying to adjust and find the equilibrium between demand and supply, and so far, the supply side weighs heavily on the market," he said, adding that older buildings will be impacted in terms of rentals and occupancy, especially those in secondary locations.

"We will probably see the older office buildings refurbished to retain existing tenants or just [be disposed] of. The latter option is seen in the recent sale of Bangunan KWSP to AIMS Data Centre Sdn Bhd at the beginning of this year after [Employees Provident Fund] purchased it some 30 years ago.

"Another example of this was the sale of the former Wisma KFC [of which] the new buyer has the intention to convert into a hotel," he said.