Office rental rates remain under pressure

In the medium term, we expect demand to see some moderation due to some form of new work-from-home arrangements, says valuer


RENTAL prices and occupancy rates for Malaysia’s office spaces remain under pressure as mismatches in supply and demand continue to exacerbate from weaker demand and a shrinking pool of tenants.

Asiacap Valuers & Property Consultants Sdn Bhd property valuer Kit Au Yong expects downside risks to persist until the pandemic situation improves which will allow office work to operate as usual without any restriction from lockdown orders.

“In the medium term, we expect demand to see some moderation due to some form of new work-from-home arrangements. Some companies may find a way to do this which will, in turn, dampen demand,” he told The Malaysian Reserve (TMR) recently.

The long-term effect, however, remains unknown, Au Yong added. He said although rental rates are facing downward pressure, it will not result in any deceleration trend.

“We may see some landlords offering incentives for tenancy due for renewal, such as a rent-free period, a refitting incentive, or flexible terms like a shorter term of tenancy and flexible space usage.

“At this stage, the occupancy rates at offices have not returned to pre-pandemic levels. I don’t see how office space demand can be normalised in the near term,” Au Yong said.

He added that co-working spaces may serve as an alternative for most corporate tenants, as operators are more flexible and respond faster to market conditions.

Overall, Au Yong said landlords will be more flexible and accommodative except those with better holding power, more financial resources and properties that are situated in sought-after locations such as areas with direct links to train stations.

CCO & Associates (KL) Sdn Bhd ED Chan Wai Seen concurred that office building rental rates are still facing downward pressure mainly due to excess supply and declining occupancy rates.

He said the Covid-19 outbreak and the Conditional Movement Control Order (CMCO) are expected to worsen the oversupply situation further.

“During the MCO, many office space providers offered rental dis- counts to their tenants, ranging from 20% up to 50% or higher. The deals were in line with the incentives provided by the government, such as a tax deduction on rental discounts offered.

“During the CMCO, many office tenants have requested for more rental discount, especially for companies that are directly affected,” he told TMR.

Chan said owners will continue to opt for reductions in rental rate to keep their tenants as opposed to leaving their office space unoccupied.

The pandemic has forced many companies to cut costs and encourage employees to work from home to curb the spread of Covid-19.

“Naturally, this will lead to a reduction in occupied office spaces, especially with the implementation of CMCO. Recovery of the office market will depend greatly on the recovery of the economy and the influx of new investments in the country,” Chan said.

“The government has projected the country’s economy to grow by 6.5% to 7.5% in 2021, which is imperative to stabilise the office market in the country,” he added.

The latest available data by the National Property Information Centre showed limited move-out and take-up activities in the office space segment in the first half of 2020 (1H20).

The country’s occupancy rate for purpose-built offices reduced marginally to 74.3% in the first six months of the year from 74.8% in 1H19, as a result of the MCO that was implemented in March.

The size of available office spaces saw a slight increase by 114.65 sq m (1,234.08 sq ft), while occupied spaces showed a minor decline of 11.38 sq m.