City&Country: New strategies to retain and attract office tenants

Landlords of existing office buildings, particularly older structures, are coming up with innovative strategies to retain existing tenants and attract new ones.

They have also become more generous, providing value added services as they strive to compete in a tenants’ market, says C H Williams Talhar & Wong (WTW) managing director Foo Gee Jen.

“Older buildings cannot compete based on their design,” Foo explains. “But they can provide extra services to tenants such as providing common areas like a conference room, even to smaller companies that seldom use such a space or by providing secretarial services.”

Some landlords, Foo says, have gone the extra mile investing in the refurbishment of lobby areas and improving the façades of their buildings. The owners of buildings such as Central Plaza and Wisma Kenanga have done this.

Foo tells City&Country that some landlords are even willing to fit out lift lobbies and toilets in a company’s corporate colours. The landlord of Menara Tun Razak on Jalan Raja Laut has upgraded the toilets for various tenants.

Another attractive strategy is to give “freebies”.

“Some landlords provide curtains and carpeting,” Foo says. “This can help the tenant save about 10% to 12% on fit-out costs. To newly fit out a 10,000 sq ft space from scratch can cost close to RM500,000.
Foo also notes that for certain types of businesses, like fitness centres and F&B outlets, landlords should consider offering turnover rental rates, where a percentage of turnover is paid as rent.

Traditionally, landlords provide two to three months free rental, as it takes about that amount of time to fit out a space to meet the requirements of the tenant. However, Foo advises that one has to give more to retain or attract tenants.

“Right now it is a tenants’ market,” he says. “Only in the past two to three years have I noticed such creative rental strategies coming into play as there are now more choices for tenants in the office space market.”

The total current supply  of office space as at 1Q2010 in the Klang Valley is over 80 million sq ft of net lettable area (NLA). Average occupancy for the entire Klang Valley is about 85%.

However, Foo expects the supply of purpose-built office buildings in the Klang Valley to decline by 2014.
“This is because developers are reining in development of office space due to the current lack of demand, especially from foreign investors, and the slow overall take-up rate of new office space,” he shares with City & Country.

WTW’s data on the Klang Valley office market is divided into three zones: Kuala Lumpur Central Area (KLCA), Kuala Lumpur Metropolitan (KLM) and Klang Valley Suburban (SUB).

KLCA encompasses the area bordered by Jalan Tun Razak, Jalan Yew, Jalan Maharajalela and Jalan Kuching; The KLM zone covers areas outside the KLCA zone like Ampang, Pudu and Setapak, while the SUB zone incorporates Petaling Jaya, Subang, Shah Alam, Kelang, Putrajaya and Cyberjaya.

Rental performance
The KLCA office supply as at 1Q2010 is 39.72 million sq ft of NLA in 145 buildings which accounts for 44% of the total number of office buildings in the Klang Valley. The occupancy rate in KLCA is just under 90%. The average rent in this zone at present is RM6 psf. Since 2003 rents in the KLCA area have increased steadily to their current average (refer to rent graph). Foo attributes this rise to the lack of supply in the area and as a result, he does not foresee rents falling much in the future.

In the other areas surveyed by WTW, rents have increased over the years but are slowly tapering off.
In the KLM zone, office supply as at 1Q2010 is 20.7 million sq ft, with an occupancy rate of about 83%. The average rents of KLM office buildings are between RM4.90 and RM5.10 psf, however, buildings with MSC (Multimedia Super Corridor) status command higher rents. Foo believes rents in this area will eventually plateau as new supply enters the market.

The SUB office supply as at 1Q2010 is 19.9 million sq ft with just over 80% occupancy. Foo says that due to the low number of buildings in the other areas in the SUB zone, Petaling Jaya with its numerous office buildings is used as a rent gauge. At present, rents in Petaling Jaya range from RM3.80 to RM4.20 psf. Over the years, WTW’s records show that Petaling Jaya rents have steadily increased but according to Foo, SUB offices will see declining rents due to new supply coming in.

According to WTW, rents in the Klang Valley have not dropped significantly but have held steady from 2009. Foo maintains that KLCA rents will continue to hold firm compared with the SUB offices. “In the long term, KLCA rents should hold steady compared with the SUB, like in Subang and PJ, where a lot more offices are coming up. So the rent pressure will be outside the KLCA zone after 2014.”

SUB rents, Foo predicts, could drop by 10% if landlords do not employ strategies to retain tenants or attract tenants at prevailing rates.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 825, Sep 27-Oct 3, 2010

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