THE purpose-built office sector in the Klang Valley has witnessed a significant increase in supply over the past few years.
This has begun to put pressure on occupancy rates as well as rentals. Nevertheless, the situation is currently still in a stable state, but the projected additional floor space from the mega commercial projects undertaken by several government-linked companies (GLCs) as well as private companies eg. The Exchange 106 and a few other buildings in Tun Razak Exchange (TRX) and Merdeka PNB 118 will increase the supply of office space substantially and this has given rise to fears of an acute oversupply situation in the coming years.

EXISTING & INCOMING SUPPLY
The supply of purpose-built office space provided in privately-owned buildings in Kuala Lumpur increased to approximately 95.9million sq ft(8.911 million sq m) last year, based on statistics from National Property Information Centre (NAPIC).

There is another 10.1 million sq ft (944,530 sq m) in incoming supply which will add onto the space available with another 6.2 million sq ft (577,455 sq m) in the pipeline, comprising projects with planning approvals. Outside Kuala Lumpur, there is a stock of about 23.4million sq ft (2.177million sq m) supplied by buildings in Putrajaya while Selangor contributes another approximately 38.9 million sq ft (3.621 million sq m).
More than 77 percent of the existing office space in Kuala Lumpur is located within the city centre (Sections 1-100 Bandar Kuala Lumpur) with the balance located outside the city centre and the proportion is expected to remain the same with the incoming and planned future supply.

There are a number of major office developments due for completion over the next few years and these are tabulated on chart 2.
Apart from the projects mentioned above, there are a few other major office developments which are part of massive integrated commercial developments in the city which have been announced and which, if launched and completed, will add significantly to the future supply of office space in Kuala Lumpur. Some of these projects involved demolishing old buildings and redeveloping the sites to take advantage of higher plot ratios now allowed by the authorities:

• Lot 185 KLCC - 500,000 sq ft of retail & office space & a hotel;
• 88 storey Signature Tower, Bukit Bintang City Centre (BBCC) by Eco World Group;
• Former Brickfields District HQ Seni Nadi;
• Tradewinds Square, Jalan Sultan Ismail (redevelopment of Kompleks Antarabangsa & Crowne Plaza Hotel)-proposed 110-storey corporate tower, 61-storey mixed use tower and a retail mall;
• Tradewinds Towers - 50- and 26-storey office towers to be built on the former Menara Tun Razak site, Jalan Raja Laut; and
•New80-storey office tower to be added to Menara Dayabumi

OFFICE OCCUPANCY RATES & RENTALS
The office occupancy rates provided by NAPIC’s report for last year overall do not show the detailed breakdown for Kuala Lumpur according to areas.
But overall, the figures indicate that the occupancy rate is around 80 per cent with buildings located within the city centre enjoying a higher occupancy than those outside the city centre. Meanwhile, the occupancy rates of office buildings in Putrajaya was reported to be 93.4 per cent, while in Selangor the figure is 75.5 per cent.

Nevertheless, the substantial supply of office space due to come onto the market is expected to result in vacancy rates rising significantly and this has prompted Bank Negara Malaysia, in its report for Q3 2017, to issue a warning of an impending glut of office space which may result in one in three offices to be vacant by 2021.This has led to the government deciding to impose a blanket freeze on all new approvals of office buildings as well as shopping malls and luxury condominiums priced above RM1 million. However, the authorities have since relaxed the freeze and developments which can be justified by the developers will now be allowed (refer to chart3and 4).

Overall, average rentals in the various sub-markets in Kuala Lumpur’s office sector registered a slight decline. We note that newly-completed buildings which have just come onto the market are of better specifications and therefore fetch higher rentals and this could have propped up the average rentals. Further, the rentals have not taken into account the incentives offered by the new buildings eg. longer rent free periods.
Older buildings which have not carried out any refurbishment exercises are affected by the stiff competition and some have lowered their rentals to arrest the drop in occupancy rates as tenants are enticed by the attractive rentals and incentives offered to relocate to the newer and better quality buildings.

MAJOR OFFICE SALES TRANSACTIONS
There were not many transactions of office buildings last year. The following were the major transactions that were noted. The highest price per sq ft was recorded by the sale of Menara Selangor Dredging at RM 1,323psf (refer to chart 6).

OUTLOOK FOR OFFICE SECTOR
The supply of office space has increased substantially over the past six years and this has raised concerns of a serious glut which may have a drastic impact on the office market.
Newly-completed buildings are taking a longer time to fill up and more incentives have to be offered to attract tenants. Older buildings, which have not been upgraded to meet the needs of modern businesses, lose out as tenants take advantage of the attractive rents and incentives to relocate to newer buildings with better amenities and higher quality specifications.

As vacancy rates rise, rentals have come under pressure. The completion and commencement of the MRT line as well as new LRT extensions have made areas which are served by the enhanced public transportation links more attractive as office locations and this has spurred the trend of decentralisation as well as flight to better quality new buildings in city fringe areas like Damansara Heights and Mutiara Damansara/Damansara Perdana. One bright spark in an otherwise subdued office market is the growth of co-working space in the Klang Valley where operators have expanded in terms of numbers as well as floor space taken up and progressed from cheaper premises located in the outskirts of the city to prime buildings in the city centre.

Overall, rentals have weakened slightly in the face of higher vacancy rates and, although generally still stable, will come under increased pressure when the huge supply of space from the few mega projects undertaken by the GLCs eg. Merdeka PNB 118 and TRX are completed in the coming years. The alarm bells raised by Bank Negara Malaysia of the glut in supply and the ramifications it has on the market as well as the banks which finance these projects have put all the stakeholders on high alert. The government’s proposed freeze on new approvals, if enforced, will help to avoid worsening the oversupply situation and buy some time to allow the market to digest the new supply. Burdened by these structural issues, the outlook for the office market certainly looks challenging in the coming years.