Rents and occupancy levels in Kuala Lumpur City’s office buildings are experiencing downward pressure, and multinational corporations (MNCs) see this as an excellent time to invest.

In light of the ongoing pandemic, companies, particularly MNCs, are increasingly interested in remote and co-working space, according to Knight Frank Malaysia.

According to the firm’s Real Estate Highlights (REH) 2H 2021 office market report, some companies, particularly MNCs, are rethinking their future workplace strategy because physical office space is critical for collaboration to maintain and boost employee productivity.

Aside from that, it is also a good opportunity for flight quality, it stated.

According to the report, the impact of the 2020/2021 lockdown has accelerated business adoption of remote and hybrid work arrangements.

Some MNCs take advantage of lower / more competitive rental rates to relocate to high-quality CBD office space.

The Asia-Pacific Prime Office Rental Index for Q4 2021 showed a 0.3 per cent quarter-on-quarter increase, the first increase since Q3 2019, with the overall index down 1.8 per cent year on year.

The overall vacancy rate remains high at 12.8 per cent. Nonetheless, office rents are likely to have bottomed out due to improved business sentiment and a gradual and more sustainable return to workplaces and hybrid working arrangements.

Knight Frank said that there is growing interest in the co-working segment in this situation, particularly among organisations looking to mitigate risks in challenging operating environments.

According to the firm, the flexibility of co-working space allows them to scale up or scale down their workforce (occupied space) based on their business needs and market conditions.

“With the successful rollout of the national vaccination programme leading to a gradual easing of restrictions (lockdown), we saw active enquiries and a gradual recovery of the office market in Q3 and Q4 2021, particularly in the co-working segment,” said Teh Young Khean, executive director, corporate services at Knight Frank Malaysia.

Teh said that because of the restrictive SOP implemented throughout 1H2021, market activity remained subdued as organisations shifted to extend existing WFH models, which led to a dip in demand.

Since restrictions gradually eased in 3Q and 4Q2021, he said, inquiries and demand for co-working space have increased as businesses seek to return to work.

“The remote and hybrid working models enable companies to have more space while evaluating the need to scale up or scale down their workforce (occupied space) based on their business needs and market conditions,” Teh explained.

Many co-working operators began with a focus on KL City. As a result, the expansion of this market segment in the city’s sub-districts is well-established. However, the co-working space trend is becoming more popular in Klang Valley and other parts of the country, according to Teh.

Demand for co-working space in crucial markets

According to Mark Saw, executive director of Knight Frank Malaysia’s Penang Branch, the office market outlook for the state should remain optimistic, with stable rents and occupancy rates, due to the limited supply of better grade office space in Penang.

As of 3Q 2021, the existing supply of privately-owned offices on Penang Island increased by 3.3 per cent to about 7.3 million sq ft, while supply on the mainland remained unchanged at 1.6 million sq ft, with average occupancy rates of around 85 and 57 per cent, respectively (Source: NAPIC).

Saw said that there is a growing demand for new office buildings with higher specifications, and those with Malaysia Status Company (MSC) accreditation and Global Business Services (GBS).

To meet the growing demand, the state government, through Penang Development Corporation (PDC), plans to establish two GBS centres, one near the existing GBS@Mayang and the other in the Bayan Lepas industrial area, he said.

He said that the Covid-19 pandemic has caused some businesses and hotels to re-evaluate their operations and re-strategise to stay afloat.

“Some businesses are embracing a hybrid working model for the present and future by converting their office space into a co-working space to promote work flexibility. For Example, M-Summit 191 is among the hotels that took the initiative to change some of their rooms to co-working spaces.

“Co-working space will continue and remain attractive in Penang as it offers flexibility, a modern work environment and low set-up cost and will become a choice to MNCs and SMEs to start their businesses,” he said.

When comparing 1H2021 and 2H2021, Debbie Choy, director of Knight Frank Johor, said that asking rents for office space in Johor Bahru have remained relatively stable.

“Office landlords, like many other industries, are eagerly awaiting the opening of Malaysia-Singapore borders to attract newer tenant pools. While gross asking rents are expected to remain stable, rental packages that incorporate and cater to the needs of potential tenants are becoming more flexible,” she said.

She said that with new office towers expected to be completed in 2022, the features and quality of these office towers, in addition to their locations, would be among the key factors that could drive product differentiation.

“More companies are exploring co-working space, a trend gaining popularity in Johor Bahru as it offers flexibility to scale business operations up or down during uncertain times. We have also noticed an increase in the occupancy of office space by co-working space operators in Johor Bahru in 2H2021,” Choy said.

According to Alexel Chen, executive director of Knight Frank Sabah, asking rents for privately-owned purpose-built office space have remained consistent in recent years.

During the height of the pandemic, however, most landlords were observed to have provided rental incentives.

He predicted that increased interest from MNCs looking to expand their footprint in Kota Kinabalu would increase occupancy levels.

According to him, the Kota Kinabalu co-working space market is still in its infancy and has only seen marginal growth in recent years with the entry of smaller-scale local operators.

Most office-based businesses in Kota Kinabalu are small and medium-sized enterprises (SMEs), with a smaller proportion of corporates.

“In general, companies have been observed to have a preference for conventional office space due to the fixed working hours that necessitates a fixed volume of office space, in contrast to the flexibility co-working space offer. In addition to that, mass preferences are still skewed towards shop-offices with cheaper rentals. Based on observation, co-working space providers in Kota Kinabalu generally cater to individuals and smaller groups who are relatively cost-conscious such as freelancers, start-ups, entrepreneurs and agencies,” he said.

Source: NewStraitsTimes, February 4, 2022