Contributed by AREA Management Sdn Bhd chairman Datuk Stewart Labrooy

Datuk Stewart Labrooy

“New Ideas often need Old Buildings”- Jane Jacobs

Nothing puts the fear of God into a property owner more than the prospect of his anchor tenant moving out to a newer flashier building down the street. If the landlord is desperate to lease out, this situation will be exacerbated.

To close the deal, the new competitor down the street drops his rent to your tenant’s current lease or lower; making you wonder how they can make any money. In response, the owner of the older building counteracts by dropping the rent, trying to retain the tenant. Sadly, the tenant decides to leave anyway as the landlord with his older building is unable to compete with the new arrival.

These are some of the typical cases that are happening nowadays.

We have to understand that rental pricing is merely one out of many reasons why a tenant decides to move out of your property. For example, some older buildings might have been worn out by the years, and the owner simply could not be bothered to refurbish the property. A competitor could easily gain favour from your tenants by offering them a newer building, matched with a good rental price. Especially in Kuala Lumpur, it is common for building owners to experience such problems.

As of the year 2017, Kuala Lumpur had a negative absorption of office space for the first time in many years. The worrying part is that by 2019, there will be an additional 6.3mil sq ft of new supply coming on stream (not considering the Exchange 106 at TRX which will account for an additional 2.8mil sq ft).

We are currently seeing a trend of falling rents and occupancy with Kuala Lumpur presently experiencing an occupancy rate of 77% and falling. In a negative absorption environment, there will be the inevitable musical chairs of tenants who will capitalise on the oversupply, demanding favourable rental terms from the new property owners. This will cause an additional hollowing out of the existing older office towers.

Although the average occupancy in Kuala Lumpur is 77%, the rate falls to below 50% if you are to survey the older buildings. Despite the bleak circumstances, owners of these older properties can salvage the situation with some new ideas.

1. Ageing Buildings - Modern Environment

Most of the Class A office buildings in the central business district (CBD) were constructed before 1990. Looking at the situation that we are currently facing, the older buildings cannot support today’s workplace.

In a growing number of cases, owners are extensively retrofitting buildings and/or converting them for other uses. Some are being taken down altogether and rebuilt to suit the needs of specific tenants. Within these projects, the traditional layout of cubicle farms surrounded by corner offices is disappearing in favour of open architecture and collaborative work areas.

Formal glass and steel finishes are being replaced with exposed brick and timber. The technology used is being upgraded to the latest, fastest and most efficient standards.

New office designs are also blurring the lines between work and play. When it comes to lifestyle amenities, companies are also incorporating bars, game rooms, rooftop gardens, gyms and more.

For example, Adobe, the American multinational computer software company focuses on giving employees an “awesome experience” by providing bistro restaurants, locker rooms, basketball courts, fitness classes, dental, healthcare facilities, hair stylists, dry cleaning and ATMs at their headquarter offices. With that in mind, owners need to reinvest in their old buildings and make them more relevant to today’s needs.

2. Co-Working Spaces is on the rise

The number of co-working spaces in the world has grown significantly in recent years.

According to Deskmag’s Global Working Survey 2017, there has been a global increase of co-working spaces from 5,800 to 11,300 since 2014. These figures are projected to reach 13,800 by 2017.

In Malaysia, there are several players in the market that currently occupy over 670,000 sq ft of the office spaces. This is set to expand to 1,000,000 sq ft by the end of 2018. The growth of freelance professionals and the formation of numerous new startup companies are a huge reason for this. The flexibility, cost-effectiveness and social components of shared working spaces are attracting more of these startups and small businesses. They are now foregoing regular office leases for co-working memberships.

With their popularity skyrocketing, starting a successful co-working space is now more challenging than ever. Investors are scrambling to get into the co-working world with all the projected profitability and demand, turning the industry into a rat race. However, with a great plan and little guidance, you too can launch a successful co-working space in your older buildings and attract a new generation of tenants.

3. City Campus for Universities

There is a growing trend for Universities to locate their campus buildings in the city central business district. This is evident in several city-based universities like RMIT Melbourne.

Since older buildings have lower historical costs and are favourably placed in central locations within Kuala Lumpur, owners can afford to undertake a retrofit to accommodate universities as tenants.

4. Alternate Use for Heritage Buildings

The Oriental building in Kuala Lumpur makes a fine example of a heritage building. Sitting next to the Masjid Jamek LRT and MRT lines, it is one of the most beautiful Art Deco buildings in Kuala Lumpur, with a well-preserved architecture. An enterprising landlord could easily convert this historical piece into an art gallery, a food destination or a headquarters for some tech company. Tenants usually appreciate the historical value of such buildings.

5. Conversion to apartments

If all else fails, there is always the option to convert a poorly performing office property into apartments. It is amazing to know how many of these buildings are actually close by to the LRT and MRT Train stations. If done properly, the landlord could easily find favour among buyers and tenants. There are endless possibilities on how to make use of your old properties. All you need is a good dose of lateral thinking and a great imagination.

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