By Viktor Chong

The oversupply of office units in Selangor isn’t new, with lower absorption rates and increase in supply for the foreseeable future. Since the current trend doesn’t seem to be changing anytime soon, landlords are forced to offer greater rental incentives to adapt to the softening occupier market.

However, multinational companies are mostly unresponsive towards the lower rental rates being offered, mainly because most products are below international standards.

On a more optimistic note, Malaysia is still seen as a more favourable hub for international organisations comparative to other Asean countries such as Indonesia, Thailand, Philippines and Vietnam. Concerning GDP, labour talent, and the ease of doing business, Malaysia is still futher developed.

According to the Asian Cities Report - Kuala Lumpur Office by Savills Malaysia, the average office rent in Greater KL has dropped by 1% quarter-on-quarter (q-o-q), falling to RM5.41 per sq ft per month in Q2 of 2018.

Statistics provided regarding the supply of office spaces are usually on the macro level, failing to take into account the office grades that are being produced. According to Savills, Grade A office rental market remained stable during the first half of 2018, holding on at a rate of RM8.27 per sq ft per month.

Despite the soft market, Savills reported a supply growth of office units in Greater KL, although all 1.86mil sq ft of the office spaces for the first half of 2018 were located in suburban areas.

Around 15 to 20% of the new supplies came in the form of stratified offerings, which generally do not compete well with the remaining en-bloc space available in the market. 1.5mil sq ft of the total new office supply offered is located in single-owner, en-bloc office buildings.

The construction of new buildings continues unabated, with about 20mil sq ft coming on stream between now and 2022. Of the future supply, 58% will be located in KL City, followed by Outer KL (22%) and KL suburbs (20%).

With the exception of TRX’s Signature Tower, the remaining city-centre space is mostly completing from the second half of 2020 onwards.

Vacancy

Generally, pre-commitment levels for office buildings (buildings that are not owner-occupied) in the region are low. The occupancy rates for newly completed office buildings in Greater KL last year and the first half of 2018 averaged at 23% and 3% respectively. High-grade offices in prime locations, however, received better responses as they are the preferred address for corporate tenants.

Based on Savills basket of 21 Grade A office buildings in Greater KL, the Grade A office vacancy rate remained relatively stable over the past five years, hovering between 14% and 17%.

On a negative note, Savills Malaysia claimed that the office vacancy rates in Greater KL (excluding Cyberjaya) continues to increase, with a 0.3% incremental for the Q2 of 2018 and 23% for Q1 of the same year.

It is possibly due to the higher vacancy rates in Outer KL where there is a large number of new additions combined with low occupancy of stratified office space.

The increase in office supply will exacerbate the issue in Kuala Lumpur, and vacancy rates are predicted to rise. However, the incoming office supply comprises buildings that are superior to their predecessors should have the ability to attract quality tenants and fetch higher rents.

As reported by Savills, the shift in preference can be seen through notable tenant movements such as the Hong Leong Bank headquarters relocating to Menara Hong Leong at Damansara City, Jardine Lloyd Thompson relocating to Q Sentral, and most recently Accenture relocating to The Vertical Corporate Tower 2 at Bangsar South.

Overall, the Grade A office market remains competitive as supply continues to grow amidst the completion of better-specified buildings.