Supply of office space in the city to considerably exceed demand

PETALING JAYA: The supply of new office space in Kuala Lumpur will be overwhelming this year making the market soft and competitive as tenants will get to pick and choose the best deals.

DTZ Nawawi Tie Leung executive director Brian Koh said an additional 2.3 million sq ft in new office space this year will put more pressure on the market.

He estimated that the average rental rate for office space in the city would ease by 5% to RM5.90 per sq ft compared with last year's figure.

“Demand will not grow as fast as supply and this will result in a vacancy rate of 12.5% this year. With the increase in new office space, the rate of unoccupied space is expected to go up to 15% by next year,” he told StarBiz.

Koh said an estimated 13.2 million sq ft of new office space was in the pipeline in the city between this year and 2013.

He said the target to have 100 multinational companies based in Malaysia and the proposed growth of the services sector would augur well for office space demand.

In its latest market report, DTZ Research said the overall occupancy rate of office buildings in Kuala Lumpur decreased from 87.1% in the third quarter of 2010 to 86.4% in the fourth quarter due to weak demand.

Total office space in the city stood at 63.1 million sq ft of net lettable area. It added that office rentals continued to be under pressure in thefourth quarter of 2010 due to competition with average prime office rent going at RM5.97 per sq ft per month in the fourth quarter of 2010.

Knight Frank executive director Sarkunan Subramaniam said office rates were expected to come under pressure and rentals would trend downwards as “completion coming onstream from new and refurbished buildings is expected to overshadow tenants' demand.”

Last year, 2.495 million sq ft were added to the market.

The new buildings included Menara PJD (414,00 sq ft), HSBC new headquarters (175,000 sq ft), Cap Square Tower (600,00 sq ft) CCM headquarters (281,000 sq ft), MIDA Building (283,000 sq ft) and BRDB Tower (221,000 sq ft).

He said the buildings, coupled with those completed in 2009 which were still being leased out, gave existing buildings stiff competition.

Sarkunan said the average rental and occupancy as of the fourth quarter of 2010 have dipped slightly to RM5.09 per sq ft and 92% respectively. Prime office rentals in the city were between RM6.50 to RM10.00 per sq ft.

“The tenant-favoured market environment will continue to prevail. There could be more incentives other than rent-free periods for negotiations,” Sarkunan said.

It would be tough to retain tenants and attract new ones, he said. “Tenant rapport is key. It is important to understand the geographical location and service type concentration in the area and target such tenants,” Sarkunan said.

He said good grade office buildings in good locations, supported by amenities and public transportation would continue to be favoured by tenants.

Offices within integrated developments that offer complementary support components such as retail and hotel facilities as well as MSC-status are expected to perform well.

CB Richard Ellis executive chairman Christopher Boyd was optimistic that the market would be balanced this year with very little hangover from last year.

“Since the end of last year we have been hearing of more multinational companies, financial institutions and oil and gas companies looking to expand their operations here.”

Boyd said rentals in most prime buildings in city's golden triangle were from RM6.50 to RM7.50 per sq ft and from RM5 to RM5.50 for secondary buildings.

“However, from the middle of next year supply will considerably exceed demand while rentals and occupancy rates are expected to weaken.”

He said a total of 4.21 million sq ft in new office office space will be completed in Kuala Lumpur this year and 5.46 million sq ft more will come onstream in 2012.

By The Star