Kuala Lumpur to see 4m sq ft of new office space supply this year

Vacancy rates are then expected to rise further.

According to a recent JLL report, positive net absorption in Kuala Lumpur’s office property sector was driven by consolidation activities and owner occupancies in the KL City (KLC) and Decentralised (DC) submarkets (e.g. a major international bank consolidated its operations in Cyberjaya to KLC, a local bank and its subsidiaries relocated its HQ from KL Fringe (KLF) to DC.) Net absorption in KLF on the other hand remained negative as market sentiment remained weak.

The aforementioned movements highlight the flight-to-quality trend as these companies relocated to higher quality more efficient buildings from older buildings.

Here’s more from JLL:

Two new completions namely Menara Great Eastern 2 contributing approximately 211,700 sq ft of office space and Tower 3 @ PJ Sentral (Menara MBSB) contributing approximately 281,500 sq ft of office space was recently added to the KLC and DC baskets, respectively.

Vacancy rates dropped in KLC and DC largely driven by owner occupancies in these new developments. In KLF, vacancy rates increased even though there have been no new completions since 2019. This is due to the ongoing trends of consolidation, relocation and right-sizing.

Declines of rents and capital values slow

KLC registered a decrease in rents amidst weak market sentiment marred by weak demand. KLF and DC registered a slight increase in rents contributed to by buildings which have decent occupancy rates as well as buildings in desirable locations commanding healthy interest. Rents in most buildings in these submarkets either held stable or declined slightly, pointing to a slowing decline in rents.

Capital values showed some stability, signalling a slowing decline of capital values in line with rents in some submarkets posting marginal recoveries. Consequently, yields remain compressed but stable.

Outlook: Supply likely to continue to outpace demand in 2022

About 4 million sq ft of office space is expected to come online in 2022. With weak demand expected to persist, this will likely inflate vacancy rates further while absorption will likely remain weak. Considering this, landlords will likely continue being open to negotiations and providing attractive terms and incentives to remain competitive.

On the investment front for 2022, value-add and bite-size deals are expected to dominate as the running theme rather than opportunities involving income-generating office assets which are tightly held and hence, few and far between.

Note: Kuala Lumpur Office refers to Kuala Lumpur's Grade A office market.