Commercial real estate market takes centre stage

By: Joseph Wong

The future is looking bright for Malaysia’s commercial real estate market. Powered by the influx of interest in data centres and strengthened by the industrial and logistics divisions, commercial real estate is emerging as a strong driver for the property industry. 

Even as Malaysia’s commercial property sector evolves around environmental, social and governance (ESG) considerations, findings from Knight Frank Malaysia’s Malaysia Commercial Real Estate Investment Sentiment Survey (CREISS) 2025 revealed that the sector underscores resilience and vibrant growth opportunities.

Based on input from industry leaders and stakeholders, the report highlights that the demand for data centres, industrial activities and logistics is being driven by surging demand for cloud computing, the growth of e-commerce and Malaysia’s position as a regional trade hub. Key developments in Johor’s data centre projects and the Klang Valley’s industrial landscape underline this trend.

While there were recent news reports which could possibly derail the development of data centres in Malaysia, it did not dampen sentiments. To recap, the reports noted the United States’ proposed restrictions on artificial intelligence (AI) chip exports, which classify Malaysia as a Tier 2 country. While the specifics of these restrictions are still under review, many remain confident that these measures will not hinder the development of data centres in Malaysia or the broader growth of the nation’s digital infrastructure sector.

To address these challenges and gain exemptions from imposed quotas, companies in Tier 2 countries like Malaysia have the opportunity to obtain validated end-user (VEU) designations, provided they comply with US standards on security, cyber resilience and human rights, according to a release from Mah Sing Group Bhd.

“This compliance not only ensures uninterrupted access to critical technologies but also strengthens Malaysia’s position as a trusted partner for global technology leaders,” the release stated. 

Mah Sing’s partner, Bridge Data Centres (BDC), is primarily owned by Bain Capital, a US-based firm, and the two have established two joint ventures to expand their data centre hub at Mah Sing DCHub@Southville City to 300MW power capacity. Additionally, Mah Sing’s 42-acre land at Meridin East township in Johor Bahru is strategically positioned for future development, capable of supporting an additional 300MW power capacity.

Meanwhile, the retail and hospitality sectors also show signs of recovery, supported by increased consumer spending and a rebound in tourism. In 2024, Malaysia welcomed 22.5 million tourists by November, marking significant momentum for 2025. Improved rental and occupancy rates are anticipated for these sub-sectors, reflecting a brighter outlook.

Despite these positive indicators, the industry faced challenges in 2024, including rising construction costs, inflation and supply chain disruptions due to geopolitical tensions. Additionally, hybrid work trends have contributed to increasing vacancy rates, creating a supply-demand gap in office spaces. The retail sector has also contended with declining sales due to brand boycotts.

Portfolio adjustments and ESG focus

“ESG is no longer a choice but a necessity for real estate players to remain competitive in a rapidly changing landscape," said Ooi.

Moreover, the CREISS 2025 findings reveal strategic shifts across commercial real estate portfolios:

• Industrial/Logistics: 48% of respondents expanded their portfolios, fueled by policies like the New Industrial Master Plan 2030 (NIMP 2030) and the National Energy Transition Roadmap (NETR).
• Transit-Oriented Developments (TODs): Rail expansions, including MRT and LRT, spurred portfolio growth, with 44% increasing investments.
• Hospitality and Offices: Most respondents maintained their portfolios in these sectors, though 27% reduced office investments.
• Retail: Activity was mixed, with 46% maintaining, 36% expanding, and 11% downsizing portfolios. Retail sales are projected to grow by 3.9%, driven by economic resilience and a strong labour market.

The survey also underscores the growing importance of ESG in investment strategies. “ESG is no longer a choice but a necessity for real estate players to remain competitive in a rapidly changing landscape. This sentiment is echoed by 91% of our survey respondents who recognise ESG’s critical role in their investment strategies,” said Knight Frank Malaysia group managing director Keith Ooi.

“The findings of the CREISS Report 2025 underline a transformative period for Malaysia’s commercial real estate market. While challenges persist, the opportunities presented by sectors such as data centres, industrial/logistics and ESG-aligned developments are significant. These insights will undoubtedly serve as a valuable resource for industry stakeholders,” added research and consultancy executive director Amy Wong.

Businesses are focusing on energy efficiency, green certifications and sustainable practices to align with regulatory changes and investor demands. The introduction of carbon tax policies in Budget 2025 highlights the urgency of ESG compliance. According to the survey, 34% of respondents have fully integrated ESG into their organisations, while 66% have partially adopted ESG principles.

Regional hotspots and future outlook

"While challenges persist, the opportunities presented by sectors such as data centres, industrial/logistics and ESG-aligned developments are significant," said Wong.

The report identifies Klang Valley and Johor as key investment hubs for 2025. Klang Valley continues to lead as Malaysia’s business and economic centre, while Johor’s proximity to Singapore enhances its appeal for data centre and industrial/logistics projects. Initiatives like the Johor-Singapore Special Economic Zone (JS-SEZ) further cement Johor’s position as a rising star in the commercial real estate market.

Despite challenges such as rising costs and evolving tenant demands, 91% of respondents remain optimistic about Malaysia’s commercial real estate prospects for 2025. Encouragingly, 34% plan to increase their investments, while Malaysia’s favourable FDI outlook—supported by RM254.7 billion in approved investments during the first nine months of 2024—underscores strong growth potential.

Key Takeaways

• Emerging Sectors: Data centres and industrial/logistics are expected to outperform other sub-sectors.
• ESG Integration: ESG is no longer optional, with energy efficiency and green certifications becoming critical investment considerations.
• Tourism Recovery: Rising tourist arrivals will boost retail and hospitality sectors.
• Regional Focus: Klang Valley and Johor remain key investment destinations.
• Industry Sentiment: Optimism prevails, with industry players adapting to challenges while capitalising on emerging opportunities.

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