Office vacancies in Kuala Lumpur slated to reach record highs

Blame it on significant increase in supply coming in the next quarters.

The total stock of office spaces in Kuala Lumpur increased in Q3 2021 with four new projects, namely TSLaw Tower, Imazium, Menara IQ (HSBC Office @ TRX) and Plaza One (PHB Conlay 301). 

According to JLL, current occupancy levels in these buildings remain low; however, there is some level of pre-commitment in each building which will see occupancy rates increase in these buildings in the coming quarters. 

With more projects expected to complete in the near and medium term, there is a likelihood that vacancy will be driven to new highs in the coming quarters. 

Here’s more from JLL:

KLC and KLF struggle while DC sees positive net absorption 

Restrained demand noted in the KL City (KLC) and KL Fringe (KLF) submarkets. The Decentralised (DC) submarket recorded positive net absorption as we witnessed a large conglomerate and its related subsidiaries relocate out of KLC into DC in a flight-to-quality move. However, overall net absorption remained negative. 

The overall vacancy rate increased in a market where consolidations and relocations are commonplace. Active tenants within the market come largely from the technology sector which has seen considerable growth in an uncertain economy.

Rents and capital values continue on a downward trajectory

Rents continue to decline as landlords become increasingly open to negotiations and providing attractive terms and incentives to retain existing tenants and attract new ones. On the other hand, tenants are taking this opportunity to relocate and renegotiate lease terms to better position themselves for the future. 

Capital values continued to drop, though at a slower rate as compared to rents, supported by a liquid market from the low interest environment, allowing cheap financing for investors/building owners to sustain operations. This, in some sense, has prevented distressed asset sales due to strong holding power.

Outlook: Vacancy rates likely to increase further

The leasing market is expected to remain soft in the coming quarters as increasing supply, downsizing initiatives and a decreasing tenant pool are acting to weaken occupier demand, thus the market is likely to experience a prolonged period of high vacancy rates. 

The investment market is likely to remain subdued in the near future as investors are likely to continue adopting a wait-and-see approach as market uncertainties persist amidst the adverse impact on the economy largely brought about by the COVID-19 pandemic.