Office rents retreat

Overall occupancy and rental rates in the Klang Valley office market for 1Q2009 indicate signs of a downward trend.
Knight Frank Malaysia executive director Sarkunan Subramaniam, when presenting The Edge/Knight Frank Malaysia Klang Valley Office Monitor for the three-month period, says the market is beginning to see the effects of the global financial crisis and weaker market sentiment.

Sarkunan expects the downward trend in occupancy to continue in the next two to three quarters, dipping by 2% to 5%. “This is mainly due to the incoming supply of new office buildings but it also depends on how much our economy slides,” he reasons.
With office space demand easing, rents have been affected slightly, with overall average rental rates dropping from the previous quarter surveyed.

“Rents are trending downwards amidst the current weak market conditions and it’s worsened by new office space coming onstream which will increase competition in that particular area,” says Sarkunan.

He says the office market has yet to reach its bottom. “It is hard to predict when the office market will bottom out.
While there are some expectations of recovery in Asia in 2H2009, Sarkunan does not foresee immediate positive effect on office space take-up in the Klang Valley.

“More often than not, the good news takes time to translate into improved take-up and a lag of six months is common. However, as supply is sizeable — 1.4 million sq ft expected in 2009 and 1.43 million sq ft in 2010 — the situation will not reverse by 2H2009,” he says.

Average occupancy in Central Business District offices continues to rise. Photo by: Patrick Goh
Sampling for the office monitor shows that the overall occupancy rate dropped for the first time since 4Q2005. It gave up 1.1% from 4Q2008’s 95%. Of the three main areas surveyed — Golden Triangle (GT), Central Business District (CBD) and Damansara Heights (DH) — only average occupancy rates for CBD increased, whilst the average occupancy rate for DH remained unchanged at 94%.

The average occupancy in GT dipped slightly to 95% from 96% in 4Q2008. Sarkunan attributes this to slowing demand and contraction by some tenants in the area. This is due mainly to the current economic slowdown. Some companies in the area are consolidating their business functions. In some cases, business expansion plans have been deferred, he says.

Sarkunan expects office occupancy in GT to ease further in the later part of the year with the completion of several new buildings in KL and its fringes, namely, G Tower, The Icon, Fraser Place and Quill Building at KL Sentral.

Meanwhile, prime A building occupancy experienced a significant drop in 1Q2009 mainly in GT and DH. The average occupancy rate for Prime A+ buildings in GT stood at a strong 99%.

Sarkunan attributes the dipped occupancy for Prime A buildings in GT and CH to reasons, such as expiring tenancies and contraction of space by tenants. Some companies also relocated their operations to cheaper buildings or consolidated their business operations.

The average occupancy in CBD offices, however, continues to rise. Secondary grade buildings did well and this Sarkunan attributes to their location, lower rents and the availability of public transport.

Average rent
It is noteworthy that the average rents in the GT, CBD and DH areas have retreated for the first time since 1Q2005, and this contributed to the first-time drop in the overall rent to RM5.18 psf per month from RM5.21 in the previous quarter.

Sarkunan says asking rents in newly-completed buildings have been revised to more competitive levels to attract tenants as it is taking longer time to fill up space than anticipated.

As a result, average rents in GT, CBD and DH have eased.

“Some of the Prime A office buildings, such as Menara Citibank, have lowered their asking rents to maintain its competitiveness,” he says.

Compared with 4Q2008, the average rents in GT and CBD have dipped by 0.5% and 0.7% to RM5.97 psf/month and RM4 psf/ month respectively. CBD covers the Jalan Dang Wangi area, part of Jalan Ampang, Jalan Tun Perak, Jalan Petaling, Jalan Kinabalu, Jalan Raja Laut and its fringes.

Among the three areas, rents in DH dipped the most in 1Q2009, by 1.8% to RM4.42 psf/month. Sarkunan says this is due to buildings such as HP Tower lowering asking rents to reflect the market, that is, from RM5.50 to RM5 psf in 1Q2009.

During this challenging period, he suggests that building owners manage maintenance issues, revise rents to realistic market levels and upgrade buildings to keep their competitiveness.

Building owners should also communicate with their tenants six months before a tenancy expires or attract new tenants with better incentives and tenancy terms, he adds.

He adds that building owners should be aware that space optimisation and cost reduction are becoming critical for companies looking for the most efficient office buildings for their business operations.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 758, June 8 – 14, 2009.
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