Kuala Lumpur to see over 3m sq ft of new office supply by 2023

Vacancy rates are likely to remain elevated.

According to a JLL report, transactions in Kuala Lumpur’s Grade A office market are likely to remain driven by local investors for the next 12 months and likely beyond, as investor sentiment for office assets remains weak amid oversupply concerns and economic uncertainty. This uncertainty adds to the likelihood of foreign investors adopting a wait-and-see approach for 2023.

“Kuala Lumpur’s new supply pipeline is expected to deliver over 3 million sq ft by 2023. This will likely push rental rates to decline further and keep vacancy rates elevated. With hybrid working practices and flight-to-quality movements expected to remain in the mid- to long-term period, demand recovery is anticipated to remain slow and staggered,” the report added.

Here’s more from JLL:

Recruitment firms emerge as a driver of leasing market activity

Net absorption remained positive across all submarkets in the quarter as demand was generated by owner occupancies as well as the recruitment and financial services industry. Notable movements included a major bank relocating to a new building, as well as several recruitment firms moving into the newly completed Pavilion Damansara Heights development.

Demand continues to improve slowly for the year but the demand-supply mismatch remains apparent.

Overall vacancy rates hold up well against new completions

The third quarter saw new supply entering the market. Of the four new office towers completed, one is the owner-occupied UOB Plaza 1 and the other three are located in the highly anticipated Pavilion Damansara Heights. Collectively, Pavilion Damansara Heights’ new office towers contributed approximately 280,000 sq ft to the Kuala Lumpur Fringe (KLF) submarket.

Marginal recovery in the vacancy rate was largely driven by the Kuala Lumpur City (KLC) and Decentralised (DC) submarkets. Several flight-to-quality movements were observed whereby the tenants, previously located in older buildings outside of the basket, relocated to newer buildings. In the KLF submarket, vacancy rates grew slightly due to a large influx of supply amid a struggling demand market.

Investment activity show signs of picking up

The investment market showed signs of picking up, and was led mainly by local investors with smaller-scale deals. This is reflected in the two office transactions that were indicated for investment purposes, within the quarter.

A decline in rents following the recent completions was observed in the quarter. These newly completed office assets faced stiff competition from the strong supply pipeline in the market over the past year.

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