Office market stable amid hybrid work, ESG trends

The Star

05-05-2025

PETALING JAYA: The Malaysian office market is expected to remain stable this year, underpinned by demand for newer high-grade offices featuring sustainable designs and up-to-date specifications.
Savills Malaysia Sdn Bhd group managing director Datuk Paul Khong said older Grade B and Grade C offices would struggle with major tenant retention issues and would continue to rely on lower rentals to stay competitive.
'Overall market stability is underpinned by moderate incoming supply, a steady performance in the prime market rents and a gradual uplift in occupancy,' he told StarBiz.
On a micro level, Khong said shifts in workplace dynamics and the growing focus on corporate social responsibility have pushed organisations to right-size and consolidate into high-quality spaces.
'Flexible office space is gaining traction as evolving work habits reshape the market.
'Post-pandemic, hybrid work, flexible leases and modular layouts drive demand and create more opportunities for co-working operators with landlords.'
Looking ahead, Khong expects demand for new offices to remain strong, supported by tenants' growing appetite for modern high-quality buildings with ESG (environmental, social and governance) features.
'The ageing office segment will need major refurbishments to continue staying relevant,' he said.
Meanwhile, Knight Frank Malaysia believes the outlook for the next 12 months suggests continued stability in Malaysia's office sector, with a tenant-favourable market environment expected to persist as businesses reassess long-term space needs and embrace more flexible, future-ready office strategies.
'With an annual change of 2.6% and a quarterly increase of 0.8%, Kuala Lumpur's (KL) office market is showing signs of steady, measured recovery.'
However, Knight Frank noted that high supply levels and evolving workplace expectations may continue to weigh on rental growth.
'Occupiers are likely to prioritise flight-to-quality strategies, while landlords may focus on improving building specifications and sustainability features to remain competitive in an increasingly discerning market.'
Olive Tree Property Consultants founder and chief executive officer Samuel Tan remains cautiously optimistic on the outlook for Johor's office sector in 2025.
'Strategic initiatives like the Johor-Singapore Special Economic Zone (JS-SEZ), ongoing infrastructure projects such as the Rapid Transit System, elevated automated rapid transit and the influx of data centres are all key catalysts driving the demand for office spaces.'
Moving forward, he said multinational corporations (MNCs) and service providers are expected to set up regional or representative offices in Johor Baru to ride on the promising growth within the state.
'Some Singapore-based companies and startups, capitalising on lower operation costs, could be keen to set up offices in the JS-SEZ.'
Meanwhile, Olive Tree Property Consultants director Tan Wee Tiam said the escalating trade war triggered by the US' reciprocal tariff is another key consideration for companies intending to set up or expand their office space within the JS-SEZ.
'The risk is compounded by the extremely fluid trade policy adopted unilaterally by the United States.
'Investors do not like uncertainties.
'As a result, while many companies may be keen to use the JS-SEZ as a platform to ride on the growth, many would adopt a wait-and-see stance, at least in the short term, for more clarity to unfold.'
Wee Tiam added that tenants, especially MNCs, are increasingly looking for high-quality office spaces that adhere to ESG standards.
'In general, office tenants, especially MNCs, are increasingly seeking offices with modern amenities, energy efficiency and sustainable features.​'
Meanwhile, Tan said the adoption of hybrid work models has led to increased demand for flexible workspace solutions.
'Companies are looking for adaptable office environments that can accommodate fluctuating occupancy levels and foster collaboration.
'Landlords of older buildings would need to consider refurbishments or repositioning strategies to attract and retain tenants.'
On the sector's performance for the first quarter of this year (1Q25), Knight Frank said KL's prime office market continued to improve, as occupier activity strengthened in select sectors despite headline vacancy rates remaining elevated at 24.6%.
'The city's rental levels held steady at RM6.01 per sq ft per month, with no quarter-on-quarter change – underscoring market resilience in the face of ongoing global and regional uncertainties.
'Notably, improving occupancy has been observed, bolstered by expansions from technology firms and MNCs aiming to reinforce their regional footprint in Malaysia.'
Khong said the general office sector in Greater KL moved positively during 1Q25, with good improvements in both net absorption rates and office rentals.
'This was well driven, mainly by demand for high-grade office spaces due to improved investor sentiments.
'Greater KL continued to record a net absorption of 0.46 million sq ft in 1Q25, a strong performance compared to an annual absorption of 1.2 million sq ft for 2024.'
Khong highlighted that the key drivers during the quarter were 'flight-to-quality' in tenant movements, right-sizing efforts and a growing emphasis on ESG trends.