Klang Valley Office Monitor (3Q2009): Leasing market likely to be more active

As market sentiment continues to improve in the belief that the recession has bottomed out, the office segment in the Klang Valley has started to show some slight movement in 3Q2009, with more enquiries for office space for lease from potential tenants.

“With renewed optimism about the economy and the property front, there is a good chance that potential tenants will commit themselves to the attractive rents being offered by landlords,” says Knight Frank Malaysia executive director Sarkunan Subramaniam in presenting The Edge/Knight Frank Malaysia Klang Valley Office Monitor for 3Q2009.

However, as most companies are adopting a wait-and-see approach for more convincing signs of an economic recovery, the enquiries from tenants are mainly for smaller office space of between 2,000 and 5,000 sq ft.

Sarkunan notes that the leasing market will likely be more active in the next quarter or two as a result of the additional space from newly completed buildings such as The Icon, GTower and Vista Tower, which are looking for tenants. Currently under construction are 8.6 million sq ft of office space in the KL city centre and 7.9 million sq ft on the city fringes.

Sarkunan: As the economy continues to improve, it is expected that demand for office space will also pick upSarkunan cautions that with the supply of new office space, the market will be more competitive; hence, the rents of existing prime A office buildings may suffer a marginal decline.
“However, some of the buildings under construction are for owner-occupation, for example, Lot C, KLCC [to be occupied by Petronas] and HSBC annexe [expansion of HSBC headquarters]. This impending supply is unlikely to create a huge impact on the overall vacancy rate in the KL city office market. The incoming supply may likely lead to a more cautious market that may translate to a slower absorption rate of office space,” says Sarkunan.

The government’s recent liberalisation of 27 services sub-sectors may also help sustain the take-up rate of new office space as more foreign companies consider the opportunities available and may decide to set up their regional offices here, adds Sarkunan.

He also believes that with quality office space coming onstream in the near future, multinational corporations (MNCs) that have relocated outside the city during the recession will be spoilt for choice.

The MNCs will likely go for new/refurbished office space in strategic locations instead of moving back to the city as the former offers better building specifications at attractive rents, says Sarkunan.

“As the economy continues to improve, it is expected that demand for office space will also pick up,” he adds.

In 3Q2009, overall office rents in the areas under survey, namely the Golden Triangle (GT), the Central Business District (CBD) and Damansara Heights (DH), continue to decline. The rents registered a 0.6% drop from 2Q2009 (average rent is RM5.11 psf). Of the four areas, DH registered the largest decline at 1.8%. Rents there currently command an average of RM4.30 psf.

In the GT, the average rent in 3Q2009 was RM5.87 psf, a 0.3% decline from 2Q2009, while rents in the CBD remained unchanged at RM3.97 psf. Rents in the GT have eased further after landlords revised them downward to stay competitive.

However, Sarkunan says rental rates may increase, especially in the GT area, despite the fact that a number of Grade A office buildings will be entering the market in the next two or three years.

“Grade A office buildings in this area are still being sought by MNCs and large companies as office rents in Malaysia are considered among the lowest in the Asian market,” says Sarkunan.

He adds that asking rents for new office buildings, such as The Icon, GTower in the GT and Lot 163 office suites in the GT, are expected to range from RM6.50 to RM6.80 psf.

Only offices in the GT showed a decrease in overall occupancy, averaging 94% (a 1% decline from 2Q2009), with prime grade A buildings’ average occupancy rates remaining at 96%. Overall office occupancy for both CBD and DH has been steady at 97% and 93% respectively, although the average occupancy rates in DH’s prime grade A office buildings dipped slightly.

“The decline in occupancy of prime A office buildings in DH since 1Q2009 is generally due to relocation and consolidation exercises by some companies during the downturn,” says Sarkunan.

The overall occupancy numbers still stands at 94%, with not much take-up.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 777, Oct 19-25, 2009.

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