Even before the disruption caused by virus Covid-19, the oversupply of office space has been growing, exerting pressure on rent over the last several years. According to research by property consultancy Jones Lang Wootton, occupancy has continued to dwindle from 81% in 2015 to hover around 74% in the first quarter of 2020, with vacancies rising from 20.48 million square feet (sq ft) to more than 30 million sq ft over the period.
Its executive director Malathi Thevendran says the pandemic has “basically only highlighted the severity of the struggling office market. “Hopefully, it will trigger some much needed government intervention by ensuring that speculative buildings are not built,” she says. Oversupply exists not only in the Klang Valley, which comprises Wilayah Persekutuan, Selangor, Putrajaya and Cyberjaya. It has been a national problem for some years now.
In its latest third quarter 2019 report on privately-owned purpose-built office space, the National Property Information Centre (Napic) reported that Malaysia has 181.34mil sq ft, with an overall occupancy of 75.4% (June 30,2019: 76.9%).
In the case of the Klang Valley, Napic reports space totalling 136.29mil sq ft in the Federal Territory of Kuala Lumpur, Putrajaya and Selangor. Among the three, Putrajaya has occupancy of 38%, versus Selangor’s 72.2% and Kuala Lumpur’s 77% as at Sept 30,2019.
With the pandemic adding to the existing vulnerabilities, Malathi says office building owners and local authorities need agile and speedy solutions in the light of the new implications brought about by the pandemic. Among them would be “local authorities imposing certain planning approval restrictions, which is practised by some countries to ensure a sustainable built environment.
“An example would be, should all new proposals and those which have been approved, but yet to commence construction, be subject to occupation guarantees?” Malathi says the market has been “crying out” for such controls and something should be done about it post Covid-19 breakout era. “We can’t attribute the current state of the market to the Covid-19 pandemic as the overbuilt situation has materialised over the past four to five years, ” Malathi says.
As economists around the world say, the virus has revealed fissures and weaknesses within every economy. The question is, do we go on living as before? Or do we take stock? The oversupply over the years has resulted in adjustments within our office market. Landlords were offering attractive incentives such as lower rental rates and longer, rent-free periods and picking up the tab for fit-outs.
While this is expected to continue, Malathi is of the view that “with the prevailing pandemic, landlords should look towards the players who are least detrimentally affected and have the potential to grow in this current situation.” “Focus on them. They include those in health industry, the wellness market, and certain manufacturers, ” she says.
With most sectors “in the soup” today, there is also the argument that the office may not be the same again. Some may want to work from home to save on rent although after the novelty is over, productivity may drop. Because space is cheap compared to Singapore and Hong Kong, we do not see the packed-like-sardines office situation here. Some may want more space although that may be a fallacy as the recession looms. Some may want long-term leases versus short-term co-working spaces.
There is likelihood to be long-term changes in the office space although it may be too soon to read the tea leaves today. But the office space will evolve. CBRE|WTW managing director Foo Gee Jen expects organisations to be agile in their operations. “Remote working arrangement could perhaps translate into demand for smaller office space in the future, ” he says.
His view mirrors that of Knight Frank’s executive director for corporate service Teh Young Khean. “Over the short-term, flexible working space may be hit. Over the medium and longer term, companies may want co-working spaces as a back-up plan.” With tales of looming recession, there may be a need to shrink or grow depending on market situation, he says.
Apart from how businesses are going to operate post-Covid-19, there is also the view that building owners will need to focus on the donut instead of the empty space in the middle. In Kuala Lumpur, CBRE|WTW reported that Menara HLA is turning the 20-year-old office building into a mixture of traditional tenants, co-working and co-living spaces, food and beverage (F&B) outlets and event spaces. “It will be a one-stop centre for corporate and start-up companies, ” CBRE|WTW says. The Klang Valley has seen offices converted into hotels the last several years, although hotels are the major casualties of Covid-19.
So there will be new market dynamics
How much rent will drop is contentious. Office rent is already rather low compared to Asean cities. Nonetheless, small and medium-sized businesses and companies are already seeking rental subsidies. MacReal International founder Michael Kong says vacancies are expected to rise with businesses closing down or rental negotiations falling apart. On the flip side, he also sees a rebirth as the pandemic gives way to new types of businesses and new ideas. The government will have to play a bigger role to empower entrepreneurs spawned by Covid-19. “Make the process simpler to incorporate businesses. Simplify business registration procedures, payment and their licensing. “Empower micro, small and medium-enterprises (SMEs) to flourish with work-from-home concepts as that appears to be the way of the future. “Encourage digitalisation, e-commerce and new start-ups. Provide grants for SMEs to upgrade their work processes online, give tax holidays for new start-ups, tax exemptions, incentives, rebates and reliefs for new businesses. “Hopefully, all this hopefully reinvigorate our entrepreneurial spirits, ” says Kong.
Like most of us working from home, this couple of weeks have given Kong, who is also president of the Association of Valuers, Property Managers, Estate Agents and Property Consultancies in the Private Sector much time to think and re-calibrate.