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Office Market Trends and Drivers in 2015

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Sentiment in the office market segment of the Klang Valley will remain stable in 2015 despite an increase in supply. Currently, it is estimated that over 90 million sq. ft. is in the market within Klang Valley and an additional of 5.6 million sq. ft. space is expected to complete and enter the market by year end. Within Kuala Lumpur Centre itself there are several notable building namely Menara Ilham, Menara Naza, TH Platinium and The Crest Tower. Other buildings completing this year outside Kuala Lumpur city centre include Damansara City in Damansara Heights, as well as the The Ascent in Kelana Jaya and Empire City in Damansara Perdana in Petaling Jaya.

The table below summarizes the list of developments which are due for completion in the year 2015:
The increased supply from these newly completing buildings coupled with static rental rates which have not increased in tandem with rising prices for commercial properties, may see the office sector transition into the “tenant’s market”. To remain competitive, certain landlords will likely maintain their base rent and offer some incentives such as rent free periods to retain existing anchor tenants. On top of that, some landlords may even include renovation packages to encourage relocation of selected key anchor tenants.

Notwithstanding the increased supply, existing buildings with good connectivity, high accessibility to public transportation such as LRT, Monorail and Komuter, are generally preferred. Besides that, buildings which possess MSC status and Green Building certification hold wider appeal especially with Multi-National Corporations (MNC). KL Sentral is a good example that fulfils the needs and demands of MNCs as reflected by the ample presence of MNC financial institutions, IT and oil & gas companies there.

 Meanwhile, some older buildings are opting to refurbish to rejuvenate their tired interiors and exteriors. It is anticipated that new updated Interior Designs and refreshed facades will attract new tenants. Some examples of buildings adopting this approach include Sunway Putra Place and Menara Luxor.

On the other extreme, older buildings such as Menara Tun Razak, Kompleks Antarabangsa and Pusat Bandar Damansara, are being demolished for redevelopment to reposition themselves. The new incarnations will offer better space efficiency with creative concepts, facilities and security to remain competitive in the market.

Office buildings adjacent to amenities such as shopping malls and hotels definitely offer an added advantage. They inevitably create office space demand due to the convenient access to daily conveniences and shopping. A variety of options for F&B, cafés or fine-dining restaurants right at your office doorstep are very appealing to corporations. An additional advantage to such developments is a higher carpark bay ratio due to their integrated nature with other components such as shopping mall. Established developments which successfully adopt this approach include Mid Valley City (The Gardens North & South Tower, Centrepoint North & South, Menara IGB, Boulevard Signature Offices) and 1 Utama (1 First Avenue and 8 First Avenue).

One last major trend for the year is the hot topic of Goods and Services Tax (GST), which would already be implemented by the time you read this. The office market is subject to GST and this will increase the total cost of rental by 6%. This may apply pressure on rental prices and landlords to accommodate this new cost. Some degree of flexibility may need to be accorded and an adjustment period is expected before a new equilibrium is achieved.

The facet of the office segment is so dynamic and constantly pushing to greater level with many more creative concepts being introduced to capture the market shares. Nonetheless, the location and its surrounding development and infrastructure will still stand at the top criteria in the tenant’s consideration. With the surplus of space to be injected and the softer sentiments in the market, landlords may find greater challenges in 2015. The office market is a dynamic one with new supply offering better quality premises. While this may impact overall demand and supply, those in good locations and better specifications will fare well. Lastly, GST will likely be felt across the market but will soon become the new market norm.

Article is written by Eric Lim, Founder and Managing Director of Hartamas Real Estate Sdn Bhd, MIEA’s Real Estate Agency of the Year 2012 to 2014 and Commercial Real Estate Agency of the Year 2011 to 2014. Log on to www.hartamas.com for more information. The article represents his personal views.