AS employers warm to the idea of working from home (WFH), how will this impact the demand for office space and the co-working sector, when and if it becomes a more permanent feature?

The office sector is likely to experience minimal adversity in the short to medium term since office tenancies, by default, have longer lease terms, notes CBRE | WTW group managing director Foo Gee Jen. “The MCO (Movement Control Order) does induce organisations to be more agile in their operations and has been an eye-opener in remote work arrangements. Perhaps, more will join in the demand for smaller and flexible office spaces in the future, including co-working.” The greater threat to the office sector, he says, actually lies in the ongoing oil price war in the international market. “If the race to the bottom persists, another gust of headwinds could await the oil and gas industry in Malaysia. Oil and gas is one of the nuts and bolts of the economy and the industry’s downfall will certainly trigger a damaging chain reaction downstream.”

Oil prices have slumped as the market faces its lowest demand in 25 years. The benchmark price for Brent crude fell by more than 5% to US$28 a barrel last Wednesday as Covid-19 continues to suppress oil demand.

At present, the occupancy rate of the Klang Valley office market — which is 112 million sq ft — is still hovering slightly above the healthy benchmark of 80%, Foo says, adding that rents have remained stable in the past few years as well. He cautions that a downturn in the oil and gas industry could lead to an oversupply situation in the Klang Valley. It was reported last September that office stock in Greater Kuala Lumpur totalled 126 million sq ft, versus Bangkok’s 97 million, Singapore’s 80 million and Jakarta’s 67 million.

AmResearch property analyst Thong Pak Leng reckons the office sector will be viewed negatively in the medium term due to an additional 20 million sq ft coming onstream in Greater KL — adding to the present 123 million sq ft — in the next two to three years. “KL City will experience the greatest impact, with 9.7 million sq ft scheduled for completion in the next two to three years. Yields are under pressure as a result of higher construction costs and weaker rents,” he says.

Nevertheless, Foo observes that the property market has been recognising the lifestyle transformation induced by technological revolution and this has led to the rise of new property hybrids in recent years, with co-working space among the better known examples. “Compared to conventional office rental, small-scale occupiers may be more incentivised to consider co-working in this difficult time as co-working is on a more flexible subscription, on monthly terms or even a pay per use basis,” he says. “All said, price competition in the co-working market could intensify in the near future as the targeted users are presumably more cost-sensitive during economic uncertainty. In addition, co-working space operators may face challenges retaining users during this period since sharing a communal space may be perceived as a risk.”

The Edge Markets

This article first appeared in The Edge Malaysia Weekly, on April 20, 2020


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