Gloomy outlook remains for office rental rates

Rental rates will only pick up when occupancy rates have improved supported by sustainable economic growth and containment of Covid-19 


RENTAL rates for Malaysia’s office spaces are expected to remain under pressure, aggravated by mismatches in supply and demand, as well as hybrid working model adopted by tenants due to the Covid-19 pandemic. 

CCO & Associates (KL) Sdn Bhd ED Chan Wai Seen said the reopening of the economic sectors under the National Recovery Phase (NRP) has encouraged the take-up of office spaces to a certain extent, but as more organisations are exploring hybrid or flexible working arrangements, the improvement in occupancy rate is marginal and will not be significant enough to improve the rental rates anytime soon. 

“Besides the Covid-19 pandemic, the office sector in Klang Valley is also affected by the influx of new Grade A offices. Generally, we think the office rental market will remain highly competitive,” he told The Malaysian Reserve. 

Chan further noted that the country’s economy hasn’t fully recovered from the risks of Covid-19 pandemic and the office market could be hit further by concerns raised over the new Omicron virus variant. 

Therefore, he foresees new take-up of office spaces will be insignificant moving forward. 

“Additionally, we also think the new office projects will likely affect the occupancy rates of existing office buildings. 

“The rental rates will only pick up when occupancy rates have improved supported by sustainable economic growth and containment of Covid-19,” he added. According to Knight Frank 

Malaysia’s Real Estate Highlights for the first half of 2021 (1H21) report, the average rental of office space in Kuala Lumpur (KL) and Selangor continued to retreat in the period as the business year started on a more challenging note with the re-imposition of multiple Movement Control Orders. 

The report noted that the market conditions were made worse by the declaration of state of emergency in January as part of the containment measures to prevent the spread of Covid-19. 

In KL, the average rental rate declined to RM6.87 per sq ft per month in 1H21 (from RM7.03 per sq ft per month in 2H20) as the protracted pandemic continued to weigh on the economy and businesses. 

Additionally, the closure and downsizing of businesses also saw the release of shadow space and more fit-out units being left behind in the market. 

As tenant retention becomes more challenging amid growing imbalance between supply and demand, this put significant pressure on landlords leading to declining rental trends, the report noted. 

Going forward, the office market outlook, especially for KL, remains challenging as supply continues to outstrip demand, placing significant pressure on rental and occupancy levels. 

Knight Frank added that although more organisations are exploring and adopting hybrid or flexible working arrangements, demand for conventional office space would remain very important with a tweak to its purpose as health and safety remain the top priority. 

The market could see a need for a place for physical interaction and collaboration space complementing other flex offices for staff to work remotely. 

The report added that the overall performance of the office market is correlated to the health of the economy, the state of which has been derailed by strict containment measures since the beginning of this year to curb the spread of rising infections. 

Nevertheless, it expects the recent acceleration in vaccine drive supported by multiple financial aids from Putrajaya will help the country transition under the NRP in line with the gradual reopening of economic sectors.