This article first appeared in City & Country, The Edge Malaysia Weekly on March 25, 2024 - March 31, 2024

With only one major completion — the Merdeka 118 tower — and currently low supply, the Kuala Lumpur and Selangor office market is expected to face supply pressure, according to Knight Frank Malaysia executive director (office strategy and solution) Teh Young Khean when presenting The Edge Malaysia | Knight Frank Kuala Lumpur and Selangor Office Monitor 4Q2023.

Teh says the three office submarkets in the Klang Valley, namely KL city, KL fringe and Selangor, saw the completion of 1.98 million sq ft of leasable space in 4Q2023 (totalling 3.71 million sq ft in 2023), including the world’s second-tallest building at 678.9m — the Merdeka 118 tower — which reportedly has a pre-committed occupancy rate of 70%.

As part of the Merdeka 118 development, the Merdeka 118 tower has a net lettable area (NLA) of about 1.65 million sq ft, featuring premium Grade A office spaces from levels 8 to 96, as well as the Park Hyatt Kuala Lumpur from levels 97 to 112. The observation deck — The View at 118 — will be on levels 115 and 116, while the conference centre and multipurpose space are on level 117 and 118 respectively.

KL city also saw the completion of Menara 1194 in 4Q2023. Located in Jalan Sultan Ismail, the 35-storey office building is integrated with a five-star international hotel with an eight-level car park. It has a total NLA of 169,250 sq ft.

The two newly completed office buildings brought the total office supply in KL city to 60.15 million sq ft in 4Q2023, while an estimated 840,000 sq ft is expected to be added to the market in 2024/25.

In the KL fringe, Pavilion Damansara Heights Corporate Tower 2 (NLA: 161,000 sq ft) in Damansara Heights was completed in 4Q2023, bringing the total supply of the submarket to 31.74 million sq ft during the quarter in review, while 920,000 sq ft of office space are currently under construction and slated for completion in 2024/25.

There were no new office buildings in Selangor in 4Q2023. Nevertheless, the submarket has an estimated current supply of 26.09 million sq ft and an incoming supply of 860,000 sq ft in 2024/25.

Teh anticipates the pipeline of office projects in KL and Selangor to encompass a total space of 2.62 million sq ft over the next two years.

Subsequent to the influx of office space in 2023, the average occupancy rate in KL city declined 3.2 percentage points (ppt) to 64.3% in 4Q2023 from 67.5% in 3Q2023. However, the average rental rate grew 2.2% quarter on quarter (q-o-q) to RM6.55 psf per month from RM6.41, which Teh attributes to the higher achievable rental rates at the prime A+ office building Merdeka 118 tower during the quarter in review.

Meanwhile, the KL fringe submarket saw an improvement in both occupancy rates and rental rates in 4Q2023. The submarket recorded an average occupancy rate of 83.4% in 4Q2023, a slight decrease from 84.4% in 3Q2023. In terms of rental rates, it recorded an average RM5.74 psf per month, an increase of 0.1% from RM5.73 in 3Q2023.

Overall, the KL city and fringe submarkets saw a net absorption of about 257,000 sq ft in 4Q2023, a slight increase from 225,000 sq ft in the previous quarter. The submarkets had a total net absorption of almost 800,000 sq ft in 2023.

In Selangor, the average rental rate remained the same q-o-q at RM4.16 psf per month. However, the submarket observed a modest improvement of occupancy rate to 74.6% from 73.9% in 3Q2023.

Much like Kuala Lumpur, Selangor experienced a positive trend in net absorption during the period in review, registering about 119,000 sq ft. The Selangor submarket’s estimated net absorption reached 364,000 sq ft in 2023, a notable increase from less than 100,000 sq ft in 2022.

Teh says 4Q2023 saw a positive net absorption in all three submarkets, with Grade A offices seeing better demand. “Looking at the full year of 2023, there is a slight uptick in the overall absorption [in KL and Selangor], reflecting a positive trajectory in the market.”

On the demand front, Knight Frank Malaysia executive director of research and consultancy Amy Wong says the inquiries for office leasing in all three submarkets are increasing, driven by prospective tenants looking to enhance the quality of their office space in alignment with their environmental, social and governance (ESG) goals. “The ‘flight to quality’ and ‘flight to green’ trends are expected to gain traction, reflecting companies’ emphasis on securing high-quality and environmentally responsible workplaces to attract and retain top talent,” she notes.

Wong says the recent government initiatives aimed at attracting venture capital and fostering start-up incubation, combined with the growing presence of major multinational corporations in the Klang Valley, are expected to generate additional interest and activity in the office market moving forward. “Multinational companies, particularly in technology, finance and professional services, are actively expanding or establishing regional offices, reinforcing Malaysia’s status as a prime destination.”

In 4Q2023, most of the notable office tenant movements in town involved companies in the banking and financial services sector, oil and gas industry, as well as co-working and flexi-space providers.

For example, a financial and investment management company relocated its office to the newly completed Merdeka 118 tower during the quarter in review, occupying 383,000 sq ft; a co-working and flexi-space provider took up 30,000 sq ft in Menara Ken TTDI and an oil and gas company relocated to MOF Inc Tower and occupied 46,000 sq ft.

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