KUALA LUMPUR (Aug 14): Knight Frank’s Asia-Pacific Prime Office Rental Index for 2Q2023 has dropped by 1.6% quarter-on-quarter (q-o-q), maintaining a year-long downward trend since 2Q2022.  This “can largely be attributed to continued soft conditions in the Chinese Mainland”, stated the global real estate consulting firm in a media release.

Vacancies rose marginally by a quarter of a percentage point q-o-q to 13.8%, which is at its highest level in over a decade. “However, seen in the context of the delivery of over 4 million sq ft of office space this last quarter, office demand has held up better than those in US and Europe, with a stronger return-to-office trend,” Knight Frank explained.

As the region is entering a new development phase, new supply in 2023-2024 is projected to add close to 10% to existing stock, driving vacancy rates up further.

“Consequently, market conditions across most of the region are expected to remain tenant-favourable for the rest of the year.”

According to Knight Frank, the highlights for 2Q2023 were: Out of the 23 cities tracked, 15 cities reported stable or increasing rents in 2Q2023, compared to 16 in 1Q2023; Perth led the quarterly rental growth at 5.3%, followed by Brisbane at 2.6%; leasing activity in Tokyo and Kuala Lumpur is rebounding on post-pandemic demand; slow economic recovery in the Chinese Mainland is amplifying the effects of an elevated supply pipeline, keeping rents under pressure.

“Landlords in major office markets across the world are managing the effects of both an economic slowdown as well as a return-to-office that has stalled, particularly in the US. Markets in Asia-Pacific have clearly outperformed with higher office utilisation rates compared to other regions, and demand is holding up better supported by a flight-to-quality trend,” said Tim Armstrong, global head of occupier strategy and solutions at Knight Frank.

“With the region’s development cycle expected to extend into 2024, the expansion of options will give occupiers leverage to secure favourable leasing terms in the current window, extending the flight-to-quality trend which will amplify the gap between best-in-class and lower-rated assets,” he added.

“The region’s elevated supply pipeline and weaker-than-expected economic rebound in the Chinese Mainland have reset expectations for the Asia Pacific office market to stage a recovery in the short term. While occupiers remain cautious about space requirements, they are also continually evolving responses to hybrid working and higher aspirations for their real estate portfolio, from sustainability ambitions to a more transformational role in operational aspects,” said Christine Li, head of research at Knight Frank Asia-Pacific.

“These dynamics will continue to fuel strong underlying demand for prime quality assets, which belies the overall declining rental trajectory, and generate new and different occupier trends across the region’s occupational markets over the current cycle,” added Li.

“We are observing strengthening market activity as the business climate continues to stabilise. Enquiry activity is on the rise as companies experiencing growth are seeking expansion and exploiting the tenant market to leverage the opportunity to upgrade the quality of the office space they occupy,” Teh Young Khean, executive director of office strategy and solution at Knight Frank Malaysia.

“Adding impetus to this flight to quality is the emphasis on ESG targets by companies with global mandates and landlords are strengthening their portfolios to deliver spaces that can match these requirements. The commercial office market in Kuala Lumpur continues to be dynamic and activity in sector is encouraging,” he added.