Property
Is the office facing an imminent death?
V Sanjugtha 
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The concept of office as we know it is dying. Technology disrupts, and office space is not spared. While market observers are upbeat on take-up potential in the country, globally, the office market is fast gaining notoriety as the scourge of the real estate market as wasted commercial space inch up each year.

With office lease eating up the second largest chunk of operating expense, organisations are striving to ensure space is utilised optimally.

The days of cubicle styled offices, reminiscent of Dilbert cartoon strips, are long gone, replaced by open spaces where the concept of office experience, or the hospitality side, leads space utilisation.

This means today’s office market is all about fewer long term leases, increased connectivity, fewer dedicated buildings for a single company or dedicated floors and a change in design to incorporate more space outside and greater automation.

It also means the dawn of an era where workplace complements home life. Integrated services such as childcare, laundry, hairdresser, gym and fitness, bicycle storage and shower facilities are considerations.

 

Hoteling

The millennials will choose office buildings based on the availability of facilities, lifestyle and sustainability credentials, where a good working environment means facilities and lifestyle services meet work enclaves as the ‘hoteling’ concept gains traction.

Work becomes more invasive and privacy is eliminated.

Hoteling is a work style where employees reserve a workstation based on an as-needed basis. This reduces the costs of idle workstations and improves space utilisation as telecommuting and working off-base become increasingly prevalent in the office culture.

Office space per person is shrinking from the traditional 200-odd sq ft per person to as low as 70 sq ft per person.

In the more advanced economies, pundits are pointing fingers at trends such as these for the rising vacancy rates in the office sector, previously assumed as a whiplash from slowing global markets.

Today, the possibility that it is simply a decline in the need for serviced office space is dawning upon building owners, as they scramble for alternatives to recoup hefty investments.

 

Has demand for office space peaked?

Datuk Christopher Boyd, executive chairman of Savills Malaysia, tells FocusM that organisations are moving to more open plan offices with workstations and this generally results in a principal requirement of say 70 sq ft per person.

However, he notes that the trend now is for more recreational areas to be incorporated into office space, including coffee areas plus more small meeting rooms.

“So, the average has not come down a lot, maybe to 100 sq ft per person,” he observes.

Boyd also points out that the modern office requirements include large floor plates, state of the art security, flexible air conditioning, 24/7 access, good parking and generally high mechanical and electrical specifications.

PPC International managing director Datuk Siders Sittampalam notes that the office market generally is undergoing a narrowing demand due to business consolidation and an increasing trend in the shared office concept.

He concurs that space per employee is moving towards a reduction from traditional rooms for senior staff to open office.

 

Co-working office

“In addition, more are relying on data centres and cloud storage data for better security in data management, therefore reducing the need for large space.

“Servers are also getting smaller due to technology advancement. Documents are digitalised and the need for hardcopies is becoming less important or are stored at factory warehouses in cheaper locations,” he says

According to Knight Frank Malaysia head of corporate services Teh Young Khean, space requirements differ from company to company.

He notes that there have been tenants taking up large space within the office building when they first set up their business in Malaysia.

But, there are also occupiers that start off with a serviced or co-working office before settling down in a conventional, permanent office as their business grows.

“Depending on the company’s business operating nature, right sizing is always the key consideration for office space planning.

“With real estate leasing cost being one of the biggest operating expenses as a business after salary, driving down leasing cost is always in mind but there is a need for a balance - to provide a comfortable working environment for employees is also a consideration,” Teh notes.

The lights are on but nobody’s home

About 700 million sq ft of office space is set to enter the world’s market in the next three years. Global construction of office space has gained significant traction in recent years, giving rise to the risk of overbuilding in some markets.

Is Malaysia one of these?

The National Property Information Centre (NAPIC) reports that office space in Klang Valley stands at 158.34 million sq ft with an impending stock in the neighbourhood of 5 million sq ft due to enter the market annually over the next four years.

Absorption rates are estimated at an average of 2 million sq ft per year, leading to projected vacancy rates in the 20% region, possibly 30%, by 2021. Currently, 80.86% or 128.03 million sq ft is occupied.

As commodity prices inch up albeit with slight volatility, reliance on tenancy from the oil and gas sector remains subdued. Landlords are turning instead to tenancy potential from call centres, banking and financial, IT, shared service organisation (SSO) and business process outsourcing (BPO).

Siders explains that the current supply of office space has led to an average occupancy of 83%, and a further addition of office space will only aggravate the prevailing oversupply in the market where demand appears to remain constant.

“With the new supply coming onstream, it’s going to take a long time for the market to reach its heydays of the pre-oil slump,” he says.

Boyd believes the office landscape will return to 90% plus average occupancy rates eventually, around 2022, for the best buildings.

“But not for long because the historical pattern shows seven- to 10-year periods of full supply followed by one to three years of tight market before the next generation of building start coming through the pipeline,” he points out.

As the construction of premium grade buildings spread across the globe, many property observers are of view that we are witnessing an upgrading of the office inventory and tenants are finally getting what they want.

 

What of the fate of the older buildings?

TRX for example is slated for completion in stages commencing the end of the year, with expected major occupiers comprising Prudential, HSBC Bank and Affin Bank Bhd.

TRX’s Exchange 106, with 2.6 million sq ft, will enter the market at the end of this year, with 52% confirmed occupancy, mainly comprising government linked companies.

“With rental at about RM17 per sq ft, no matter how premium grade the building is, it will be a tall order.

“It will probably entail luring existing tenants from other buildings which really does not better the occupancy rates at all,” a property consultant opines.

He also drew attention to Menara PNB 118, expected to be the tallest tower in Southeast Asia when completed in 2024.

Permodalan Nasional Bhd (PNB) then group chairman Tan Sri Abdul Wahid Omar had mentioned that only 20% of the tower space or 500,000 sq ft will be leased out with PNB’s group of companies occupying 60 floors and 20 floors reserved for a hotel.

The consultant points out that the relocation of PNB’s companies will create a massive void in the market.

Knight Frank’s Teh notes that initiatives and concerted efforts of various government agencies such as InvestKL Corporation Sdn Bhd, Malaysia Digital Economy Corporation (MDEC) and Malaysian Investment Development Authority (MIDA) continue to drive investments into Malaysia.

He points out that many businesses have set up their offices in Kuala Lumpur.

“Since its inception in 2011, InvestKL has attracted 73 multinational corporations (MNCs) with total investment of RM11.07 billion in value, approved and committed.

They include IWG Shared Services, Honeywell, Veolia, Dimension Data, Globee and Ali Baba,” he adds.

Teh expects rents and occupancy levels to move upwards but this will take time as the market is still recovering. He sees a time frame of three to five years.

 

How to remain competitive in a tenant’s market

The lopsided supply-demand dynamics tilts the power play in favour of the tenants, demanding better terms from building owners.

Siders foresees both existing and new tenants negotiating for better tenancy terms, for example longer contracts with favourable terms such as longer rent-free period and fit-out contributions.

He believes the older buildings may have to look at refurbishment and retro-fitting to keep up with newer buildings.

“In order to break even the building has to equate the total gross income with total operating expenditure including debt-servicing. Personally, the breakdown occupancy should not be less than 75%,” Siders opines.

Teh notices that landlords are increasingly motivated in negotiations as they look to entice prospective tenants. They are also a lot more flexible in negotiating terms with prospective tenants.

“Besides offering attractive rental rates, there are landlords that provide other incentives such as longer rent-free period, initial capex funding for fit-out to be repaid over the lease term, free car park allocation and additional in-house facilities as part of the deal,” he notes.

Teh believes the tenant-led office market will continue to be competitive in the coming years, especially in KL city.

He points out that in addition to offering a competitive and attractive rental package, owners of older buildings may need to upgrade their buildings. These can include improving specifications in terms of infrastructure or aesthetic upgrading for a more contemporary façade.

“These upgrading works do not necessarily mean competing with Green, MSC (Multimedia Super Corridor) or Transit Oriented Development (TOD) buildings but are just ways to attract tenants to the buildings,” he explains.

He also stresses the need for a good property management plan to ensure tenants’ needs and requirements are well taken care of.

Knight Frank’s analysis notes that a demand-driven office boasts large floor plates of 15,000 to 25,000 sq ft, has multiple entrances and provisions for subdivision with simple geometrical shaped plates.

TODs are preferred, as are integrated development with malls, residences and hotels.

Other plus points include hardware and connectivity support for IT communication and building certification such as MSC status and Green certification.

Boyd however views building certification differently.

“Green status is highly overrated and can be very troublesome for tenants because it tends to limit the allocation of electric power to users.

“MSC status is in need of a complete overhaul and review. Its original objectives have been lost in the sands of time and it now just remains a proxy for mechanical and electrical quality,” he notes.

According to Boyd, the viability of a building depends on numerous factors, but generally it is successful if it reaches 85% occupancy.

He believes office space demand is largely controlled by economic growth, explaining that such demand is indicated by company expansion, new companies coming into Malaysia, and the emergence of new trends such as co-working spaces.

“All of these are evident in Malaysia but remember that demand normally comes from growth.

It is very rare for a company to uproot and relocate wholesale to another country,” he points out.

Boyd hints that there are a few “very major multinationals” expanding in Malaysia but declines to elaborate. FocusM




This article first appeared in Focus Malaysia Issue 293.