Kuala Lumpur to see over 3m sq ft of new office supply by year-end

The weak demand and oversupply are expected to accelerate rental decline.

According to a JLL report, Kuala Lumpur’s new supply pipeline for Grade A office spaces is expected to deliver over 3 million sq ft by the end of 2022, likely exacerbating the rental decline currently noted in the market given the elevated vacancy rates. 

“With the current trend of right-sizing and consolidation expected to continue, demand is likely to remain challenging. Furthermore, the flight-to-quality trend is expected to continue,” the report said.

Here’s more from JLL:

Transactions in the office market are likely to remain skewed towards owner occupancy, as opposed to being purchased for investments. This will likely be the case for the next 12 months and even beyond, as investor sentiment for office assets remains weak amid oversupply concerns and economic uncertainty.

New/recent completions seen to be core demand drivers

Net absorption turned positive across all submarkets for the first time since the pandemic started, due to demand generated by new/recent completions as tenants look to upgrade their spaces amid the current trend towards flexible working. Examples include Exchange 106 in the KLC submarket as well as Imazium in the DC submarket.

Some significant movements in the quarter are seen to be coming from the technology, financial services and pharmaceutical industries. Flight-to-quality remained a dominant theme in the leasing markets.

Vacancy rates post marginal recoveries

No new supply was recorded across all submarkets for the second consecutive quarter. Significant incoming supply is expected in the second half of 2022 which will further elevate vacancy rates in the city.

Vacancy rates posted marginal recoveries in KLC and DC with leasing activity in these submarkets seen to be coming from new/recent completions. In the KLF submarket, vacancy rates were maintained as the market mostly saw lateral movements.

Bearish rental and investment market remains

In the quarter, the decline in rents was led by ageing office assets, most of which have increasing vacancy rates, due to tenants seeking to upgrade their spaces.

In 2Q22, there was only one office transaction, intended for the purchaser’s own use. On the investment front, the market remained quiet as investors adopted a wait-and-see approach amid a challenging economic outlook.