Persistent Oversupply Keeps Office Vacancy Rates High in Klang Valley
As of the fourth quarter of 2024, Klang Valley’s office market continues to struggle with persistently high vacancy rates, a reflection of ongoing oversupply amid evolving workplace trends. According to Bank Negara Malaysia (BNM), the total stock of office space rose to 121.7 million square feet, up from 121 million sq ft in the second quarter, but demand remains sluggish.
Elevated Vacancy Rate at 28.3%
The office space vacancy rate stood at 28.3% by end-2024, only slightly lower than the 28.4% recorded in the preceding two quarters. This elevated rate underscores the imbalance between supply and demand, particularly as developers continue to deliver new projects into an already saturated market.
BNM highlighted that despite marginal changes, the core issue remains unsolved — with office occupancy unable to keep pace with supply.
“Continued observations of preferences for more flexible tenancy contracts and hybrid work arrangements suggest adjustments in supply still have some way to go,” BNM stated in its Financial Stability Review – Second Half 2024.
What’s Driving the Office Space Oversupply?
Several factors continue to pressure the Klang Valley office segment:
- Hybrid work models: Companies are downsizing their physical office footprint as more employees adopt remote or flexible working arrangements.
- Demand for flexible leases: The traditional long-term office leasing model is increasingly being replaced by shorter, more adaptable tenancy agreements.
- Excess pipeline: Years of aggressive office development, particularly in Kuala Lumpur and surrounding areas, have led to an oversaturated market.
Non-Residential Property Risks Remain Contained
Despite the office segment’s challenges, BNM maintained that overall risks in the non-residential property sector are contained. This suggests that while vacancy rates are a concern, they are not expected to trigger broader instability in the real estate market or banking sector.
Shopping Complexes Show Modest Recovery
On a more positive note, the retail property segment is showing early signs of recovery. Shopping complex vacancy rates improved slightly, declining from 22.4% in Q3 2024 to 21.2% in Q4 2024. The improvement is attributed to:
- Increased footfall in prime shopping destinations
- Stronger consumer sentiment
- The return of tourist spending and retail activity
These trends suggest that consumer-facing real estate assets are adapting faster than the commercial office segment in the post-pandemic landscape.
Implications for Property Investors and Developers
For real estate professionals and investors, BNM’s findings highlight key areas to watch:
- Office space developers may need to reconsider future supply pipelines and explore repurposing strategies (e.g., co-working spaces, residential conversions, or mixed-use developments).
- Investors should scrutinise rental yields, tenancy terms, and occupancy trends when evaluating office properties.
- Retail spaces in well-located urban areas are gaining traction again, offering potentially better short-to-medium term returns compared to office investments.
Looking Ahead
As Malaysia continues its transition into a post-pandemic economy, the commercial real estate market must evolve alongside shifting work and consumer behaviour. While shopping complexes show encouraging signs, the office space segment remains under pressure, requiring innovative leasing models and possibly reimagined uses for underutilised space.
For property stakeholders, adapting to these dynamics will be crucial to navigate the next wave of urban transformation.
