Office space take-up rate drops with O&G downturn
Saturday, 22 Sep 2018
JONES Lang Wootton’s in-house research indicates that the annual net office take-up in the Klang Valley in 2016 and 2017 was 1.25 million sq ft and 0.57million sq ft respectively.
These figures are relatively low compared with a very healthy market when the net take-up can be in excess of 3.5 million sq ft per annum.
One of the reasons for the decline is that the amount of office space occupied by major tenants within the oil and gas (O&G) sector and businesses linked to them has declined since the major decline in oil prices in 2014.
One example is ExxonMobil Exploration and Production Malaysia Inc, which undertook cost cutting measures and in early 2017 only renewed approximately 60% of the space at Menara ExxonMobil, which it previously fully occupied. Other large and small industry players either downsized in the Golden Triangle by reducing headcount and office space requirements, relocated away from the Golden Triangle or closed down.
The average occupancy rate in the Golden Triangle has been declining since 2014 and as at 2Q18 it stood at 78%, which is an all time low and the same as the occupancy rate in the fourth quarter of 1999 (4Q99) in the wake of oversupply and the 1997 Asian financial crisis.
Based on a “Profile Trend Analysis”, the O&G sector along with the public sector, IT, property / construction, banking & finance, trading and insurance have traditionally dominated office space occupancy. Since 2013, however, the profile of the top three most dominant sectors has partly changed with O&G and government and its agencies being replaced by services and IT with banking and finance staying consistent. Back in 2013, the O&G sector registered the highest net take-up (by sector) at 681,400 sq ft followed by government and banking & Finance.
In a reversal of roles in 2017, O&G sector registered the highest consolidation with a negative net take-up of 372,300 sq ft.
Moving forward, companies associated with digital space and advanced technologies and companies innovating with new technologies, Internet of Things (IoT) and industry 4.0 technologies, such as artificial intelligence and big data analytics will support demand growth for office space. The O&G sector’s presence is likely to increase in the longer term once oil prices have stabilised at higher levels.
Co-working (utilising communal flexible office space on a short-term basis) is also expected to continue to grow. This could be a threat to office landlords as it gains momentum among traditional corporate tenants with mobile working arrangements likely to reduce office space requirements.
Also challenging for landlords is the declining average worker space ratio (space utilised per employee) as more companies move towards an environment within which employees work together resulting in less space being utilised for private offices.
The development of technology has also decreased the size of office equipment and the increasing costs of doing business has made companies more conscious about the use of space with many now using their working space more efficiently.
As at 2Q18, the Klang Valley’s purpose built office stock was 119.46 million sq ft with a 77% occupancy rate. The gross domestic product (GDP) growth in 2017 was 5.9% (2016: 4.2%).
The relatively good performance of the economy has, however, not really yielded any recent demand growth and the office market oversupply scenario continues to compound further along with slower leasing activity.
As an interesting comparison, just before the Asian financial crisis in 1997, the Klang Valley’s office stock was 41.77 million sq ft with an average occupancy rate of 94.1%.
The high occupancy was fuelled by strong net take-up of 3.88 million sq ft in 1997, underpinned by high GDP growth of 10.0% and 7.3% in 1996 and 1997, respectively.
There are no forecasts to suggest a quick return to the steady growth environment of say five years ago. In 2014, the annual net take-up of office space peaked at 3.986 million sq ft, while the GDP growth was 6.0%.
The occupancy rate’s decreasing trend since 2014 is forecast to continue, possibly reaching the low 70% by 2020. This will only lengthen the current down trend in the office market cycle.
In all respects, the market may not return to a balanced level until well into the 2020s, particularly if there is a prolonged period of uncertainty, slowing economy with no major catalyst to boost demand; employment data also point towards a slowing growth environment.
Between 2012 and 2014, IT, financial and insurance, professional, administrative and support services grew by a CAGR of 6% and comprised the bulk of office occupiers in Kuala Lumpur and Selangor. In 2015-2017, it grew at a much slower CAGR of 1.1% (Source: Department of Statistics – latest available data).
Putting this into perspective, Klang Valley’s vacant space in 1997 was 2.46 million sq ft. In 2007, it had accumulated to 11.06 million sq ft (CAGR – 16.2%, 1997-2007). Thus, there has been a perpetual and growing oversupply scenario.
There is currently approximately 28 million sq ft of unoccupied office space (CAGR – 9.2% between 2007 and 2Q18).
Based on Jones Lang Wootton’s office grading matrix, the bulk of 62.5%, or 17.5 million sq ft, is prime grade space and 37.5%, or 10.5 million sq ft is secondary grade space.
This dispels the fallacy that “prime buildings are better occupied than secondary buildings”. Based on an average gross rent of RM4.60 per sq ft per month, this translates to an effective “loss” of RM126mil of monthly rental income or an alarming just over RM1.5bil per annum.
Furthermore, based on an average construction cost of RM325 per sq ft this amounts to RM8.93bil “worth” of vacant space. Collectively, these amounts are indeed alarming and if many developers/landlords had read the market properly, this effective “waste of money” could largely have been avoided.
David Jarnell is senior vice-president and head of research and Malathi Thevendran is executive director (research and consultancy) at Jones Lang Wootton ([email protected])