Will remote working or hybrid working models affect the local office market? 

With all states in Malaysia currently under the National Recovery Plan (NRP), all economic and business sectors are adjusting to a new normal in compliance with stringent standard operating procedures (SOPs). 

While some property sectors are experiencing growth, others still struggle to find their new levels. For the office market, which had been slipping due to an oversupply that was compounded by the effects of the pandemic, the after-effects of remote and hybrid work arrangements have yet to settle.

The pinch from the 2020–2021 lockdowns has accelerated the adoption of remote and hybrid work arrangements among businesses, according to the office market report of Knight Frank Malaysia’s Real Estate Highlights 2nd half of 2021. 

Some companies, especially multinational corporations (MNCs), are evaluating their future workplace strategy as physical office space remains important for collaboration to maintain and boost productivity levels among employees. 

For companies seeking new offices, it is an excellent opportunity for a flight to quality. Some MNCs are taking advantage of competitive rentals to move into high-quality central business district (CBD) office space. 

According to the Asia-Pacific Prime Office Rental Index for Q4 2021, there was a 0.3% quarter-on-quarter increase, the first uptick of rent rise since Q3 2019 with the overall index down 1.8% year-on-year. 

Overall vacancy remains elevated at 12.8%, but office rents are likely to have bottomed out, thanks to improving business sentiments as well as a gradual and more sustainable return to workplaces and hybrid working arrangements.  

Under this situation, there is growing interest in the co-working segment, especially among organisations that wish to mitigate risks amid challenging operating environments. The flexibility of co-working space enables them to scale up or scale down their workforce depending on their business needs and market conditions. 

“We saw active enquiries and gradual recovery of the office market in Q3 and Q4 2021,” said Teh.

“With the successful rollout of the national vaccination programme leading to a gradual easing of restrictions (lifting of lockdown), we saw active enquiries and gradual recovery of the office market in Q3 and Q4 2021, especially in the co-working segment,” said Knight Frank Malaysia corporate services executive director Teh Young Khean.

Restrictive SOPs implemented throughout 1H2021 meant that market activity remained muted as organisations shifted to extend existing work from home (WFH) models, which led to a dip in demand, she explained. 

Since restrictions were gradually eased across 3Q and 4Q2021, enquiries and demand for co-working space rose as businesses sought to return to work.  

KL City was the initial focus area of many co-working operators, therefore, the growth of this market segment in the city’s sub-localities are well-established. The co-working space trend is starting to be increasingly prominent not only in Klang Valley but also in other states in the country.  

More companies are exploring co-working space, a trend gaining popularity in Johor Bahru, said Choy.

“More companies are exploring co-working space, a trend gaining popularity in Johor Bahru as it offers flexibility to scale business operations up or down during uncertain times. 

“We have also noticed an increase in the occupancy of office space by co-working space operators in Johor Bahru in 2H2021. Common Ground made their debut into Johor’s market by commencing their operations at Medini 6,” Knight Frank Johor director Debbie Choy.

It was a similar story in Penang. Knight Frank Penang executive director Mark Saw said the Covid-19 pandemic has changed how some businesses and hotels operate and re-strategise to stay afloat, with some companies adopting a hybrid working model for now and the future by transforming their business space into co-working space to promote the flexibility of work. 

“For Example, M-Summit 191 is among the hotels that took the initiative to change some of their rooms to co-working space. In tandem with Penang Vision 2030 to be a smart city in promoting a high-tech ecosystem, co-working space will continue and remain attractive in Penang as it offers flexibility, a modern work environment and low set-up cost and will become a choice to MNCs and SMEs (small and medium enterprises) to start their businesses. 

“Limited supply and high demand of good grade offices in Penang should also cater to the demand. Currently, notable co-working spaces in Penang include Regus, Spaces Beach Street, Common Ground, Settlement, Masco and others,” he said.

In Sabah, the market for co-working space in Kota Kinabalu is still in its infancy stage and has only observed marginal growth in recent years with the entry of smaller-scale local operators. 

Co-working space providers in Kota Kinabalu generally cater to individuals and smaller groups, said Chen.

“The majority of the office-based businesses in Kota Kinabalu consist of SMEs, along with a smaller proportion of corporates. In general, companies have been observed to have a preference for conventional office space due to the fixed working hours that necessitates a fixed volume of office space, in contrast to the flexibility co-working space offer. 

“In addition to that, mass preferences are still skewed towards shop-offices with cheaper rentals. Based on observation, co-working space providers in Kota Kinabalu generally cater to individuals and smaller groups who are relatively cost-conscious such as freelancers, start-ups, entrepreneurs and agencies,” said Knight Frank Sabah executive director Alexel Chen.

Still a tenant’s market

The Klang Valley office market continues to remain tenant-led, especially in KL City, where the rental rates and occupancy levels of office buildings are experiencing downward pressure.  

Corporations and companies are finding a balance between driving growth while maintaining operational and cost-efficiency to surpass the growing supply-demand mismatch in the office market. 

“Due to the limited supply of better grade office space in Penang, the office market outlook for the State should remain optimistic with stable rents and occupancy rates. As of 3Q2021, the existing supply of privately-owned offices in Penang Island increased 3.3% to approximately 7.3 million sq ft on the quarter, while on the mainland, supply remained unchanged at 1.6 million sq ft with average occupancy rates at circa 85% and 57% respectively,” said Saw.

Generally, there is a growing demand for new office buildings equipped with better specifications as well as those with Malaysia Status Company (MSC) accredited status and Global Business Services (GBS), he said.

“Penang is home to several MSC companies and with the state government through Penang Development Corporation (PDC) taking a proactive initiative to meet the growing demand of the Global Business District industry with the two existing GBS buildings, namely GBS@ Mayang & GBS@ Mahsuri, recording high occupancy rates – there are plans to set up two more GBS centres, one to be located near the existing GBS@Mayang and the other in the Bayan Lepas industrial area,” he added.

The Klang Valley office market continues to remain tenant-led, especially in KL City.

In Johor, Choy said the asking rentals of office space in Johor Bahru have remained fairly stable when comparing 1H2021 and 2H2021. Like many other sectors, office landlords are eagerly awaiting the relaxation of the borders between Malaysia and Singapore to attract newer tenant pools. 

“Whilst the gross asking rentals are anticipated to remain stable, rental packages to incorporate and tailor to the needs of potential tenants are becoming flexible. With new office completions expected in 2022, the features and quality of these office towers apart from their locations will be among the key factors that may drive product differentiation,” she said.

In Sabah, Chen said the asking rentals of privately-owned purpose-built office space have held constant in recent years, although the majority of landlords were observed to have granted rental incentives during the height of the pandemic. 

“As of now, these arrangements have generally ceased, particularly as the state entered into the final phase of the National Recovery Plan in late 2021, whereby office operations were permitted to resume at full capacity,” he said.

On a positive note, increasing interest from MNCs seeking to expand their footprint in Kota Kinabalu may translate into an increase in occupancy levels, he said.

“However, in the short-term, this is unlikely to significantly influence the current market landscape as a translation of such interests normally involves lengthy procedures with a strict set of office space requirements to be fulfilled,” he said.

Co-working space, which offers readily available fully fitted office space, grants companies the ability to meet their operational needs quickly. The flexibility of co-working space further allows corporate planners to scale up or down depending on their growth models.

It is an attractive option that many organisations are exploring and will continue as businesses remain cautious on new Covid-19 variants, said Teh.

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