Grade A office rent under pressure

Low oil prices and slowing economic growth have resulted in companies from across the board renegotiating their leasing agreements, property consultants say.

The focus seems to have fallen on oil and gas companies (O&G) because they have been paying top dollar for their space in order to be near Petronas. The result of new negotiated deals is likely to see new pressure on rental rates, which already is among the lowest in the region, property consultants say.

Some of the top grade office space in the city includes the Intermark, Menara ExxonMobil and Menara Maxis. The Petronas Twin Towers is considered as super prime.

JLL Malaysia country head Y.Y. Lau says O&G companies take up 26% of top grade office space in the city. Banking sector takes the lion’s share at 33%.

JLL’s basket of top grade office space is large at 48.4 million sq ft and includes the central business district and fringe areas including Bangsar South, KL Sentral and Damansara Heights.

The global plunge in oil prices since October 2014 and Malaysia’s reliance on the commodity has drawn focus on the impact of the fall on the real estate sector.

Last Week, StarBiz front-paged the impact of low oil prices on ExxonMobil Exploration and Production Malaysia Inc which joined a list of companies to embark on cost cutting measures, particularly in terms of office space.

To recap, sources said the company might return several floors of the 29-storey Menara ExxonMobil it currently occupied in the city centre to KLCC Property Holdings Bhd (KLCCP) once its tenancy agreement expired in January 2017.

“Traditionally, O&G companies concentrate on the KLCC area because they prefer to be near to Petronas, their working partner. Due to this proximity, O&G companies are among the highest paying tenants in the office markets,” says Lau.

Plunging oil price and slow economic growth have resulted in companies becoming cost conscious. However, this is not limited to just O&G sector alone.

Banking sectors are “rightsizing” and reorganising. Other sectors have been impacted but banking and O&G takes the big bulk of top grade city office space with the oil conundrum directly impacting the O&G sector.

When companies are in cost saving mode, critical questions on office space pops up.

Knight Frank Malaysia managing director Sarkunan Subramaniam says payroll takes up more than 50% of costs among multinational companies, followed by real estate at between 15% and 20%.

In first half of 2015, published figures has about 6,500 workers being laid off in the Malaysian labour market, with about 30% of that coming from O&G industry. The actual number laid off may be higher.

“When companies reduce staff, it is natural they also reduce the space occupied. This is why O&G companies are reducing footprint,” says Sarkunan.

“Although oil price slid in October 2014, the reality is setting in now that the low oil price regime is not a temporary phenomenon. It started with Petronas contractors being hit. They were the first casualties. Now the next tier of bigger players are being hit,” he says.

Other sectors are facing similar situation. Sarkunan says landlords must take cognizance of the fact that tenants do not like to be in this situation.

“If they can accept this, the likelier their tenants will be retained and maybe, regrow when oil price improves,” he says.

Sarkunan says the space occupied by O&G companies varies, ranging from 5,000 sq ft to several hundred thousand sq ft. The big ones can take up to 700,000 sq ft. Large players like ExxonMobil and Shell take up above 500,000 sq ft each.

If landlords remain inflexible, smaller operators will be forced to go, he foresees.

“We are renegotiating a number of deals for a win-win outcome for our O&G clients. If O&G companies are not going to make money, what can anyone do? It is a global situation,” he says.

Considering the current global economic situation, when companies like Exxomobil downsizes, it is not something happening only in Malaysia. “It is a global decision. O&G exploration companies are already downsizing,” VPC Alliance (KL) Sdn Bhd managing director James Wong says.

While many would like to maintain where they are today, which means they have to relook the space they are occupying, there will be some who may opt for a downgrade. Others relocate departments to countries which offer lower operating costs, wages and other competitive factors.

“It appears that rental for top grade offices will come under pressure,” Wong says.

A check with Menara Maxis’ shows that occupancy rate remain high at 95% with three to four floors – or less than 10% – occupied by O&G tenants,” a source says.

The 49-storey building was developed by KLCC Properties Holdings Bhd (KLCCP). According to KLCCP website, the company property portfolio within the KLCC development includes Suria KLCC, Mandarin Oriental, a commercial vacant land known as Lot D1 and a 33% interest in Menara Maxis. Beyond the KLCC area, it owns Kompleks Dayabumi. - By Thean Lee Cheng and Eugene Mahalingam (The Star)