Rising Tenant Demand for Green Office Buildings: An Opportunity for Commercial Assets in Kuala Lumpur

The city aims to achieve a 70% reduction in carbon emissions intensity per unit GDP by 2030 and has set a long-term goal of achieving net-zero emissions by 2050, showcasing its determination to create a low-carbon future. In particular, the built environment holds a key role in KL’s decarbonization: 41% of the city’s carbon emissions are attributed to stationary energy, i.e. energy consumed in buildings, the bulk of which comes from commercial and institutional buildings¹.

Growing appetite for sustainable offices

Kuala Lumpur has witnessed a healthy growth in green office buildings. Over the past five years, the proportion of green certified Grade A office stock significantly rose from 16% to 41% by the end of 2023. In the absence of existing nationwide mandates or policies for green certification, multinational corporations are driving the flight to green stock as these companies opt for greener office spaces to meet their sustainability and climate goals.

According to JLL research, 87% of occupiers in APAC, including Kuala Lumpur based occupiers, envision their office portfolios to be 100% green certified by 2030. Companies recognize that by integrating ESG principles in their portfolios, they can improve operational efficiency, enhance their reputation and mitigate risks, which lead to cost savings and increased access to capital.

Notably, carbon emissions are coming into the spotlight as prominent companies face increasing pressure from Bursa Malaysia’s enhanced climate reporting requirements for large, listed companies, prompting them to mitigate climate change risks and reduce their carbon footprint. Currently, 78% of the top 100 occupiers in Kuala Lumpur have committed to the Science-based Targets Initiative (SBTi) or publicly announced carbon reduction targets. As the deadline for their climate commitments draws closer, occupiers will demand for highly sustainable and low-carbon workplaces.

Impending shortage in low-carbon sustainable workplaces

Green certified buildings serve as a starting point. Yet, current green building standards are insufficient to guarantee emission reduction or attain a net zero carbon-built environment. Although the government has launched initiatives such as the Energy Efficiency and Conservation Bill 2023, and Low Carbon and Zero Carbon Building Facilitation Programs to facilitate the decarbonization of buildings, these programs are in their infancy. In the absence of net zero carbon-ready office buildings in the country, occupiers gravitate to top-grade, best-in-class green certified offices.

Our analysis of the demand-supply gap for sustainable workplaces focusing on NZC showcases that demand will outstrip supply in KL by 91% by 2028. 3.3 million square feet of green certified office stock is projected to be added in the same period, with only 0.69 million sq. ft. of planned platinum grade green certified stock. Considering the ambitious climate targets of occupiers, the market faces an impending shortage of high-quality sustainable offices by 2028.

Figure 1: Supply Demand gap of best-in-class ESG-focused space (up to 2028)

To address this pressing issue and ensure the availability of sustainable and energy-efficient office spaces in Kuala Lumpur, there is an urgent need and opportunity for additional high-quality green building developments. Exemplary developments include the Merdeka 118 tower and the Tun Razak Exchange (TRX).

Case study: Menara Merdeka 118

Merdeka 118 project stands as the first office building in Malaysia targeting triple platinum certifications in LEED (achieved), Green Real Estate (GreenRE), and Green Building Index (GBI). It is also in line to attain WELL certification. Owned and developed by PNB – an aspiring net zero enterprise by 2025 – this project demonstrates PNB's proactive approach towards creating sustainable office spaces that meet the growing demand in Kuala Lumpur. The project has attracted Maybank as an anchor tenant as the bank sought out spaces aligned with its sustainability targets while improving its branding. The Merdeka 118 project attained an occupancy rate of 70% before completion, and its success serves as an exemplary case for investing in high-quality sustainable buildings to attract and retain tenants.

Merdeka 118 Image source: CTBUH

Case study: Tun Razak Exchange (TRX)

As a pioneer in high quality, district-wide sustainable development, TRX is the first project in Malaysia to achieve the LEED Neighborhood Development Gold precertification and Green Building Index Accreditation Panel (GBIAP) Platinum Provisional Certification. All 30 buildings (current and future) in TRX are LEED or GBI certified, and other noteworthy district-level initiatives include the recycling of wastewater for non-potable purposes which reduces potable water demand by over 50%, and designing biophilic green spaces and parks that cover 23% of the site area.

TRX's innovative sustainable design features and accolades have drawn in MNCs with sustainability goals, such as HSBC, Affin Bank, and Prudential. Notably, Affin Bank’s HQ – Menara Affin – is LEED and Green Building Index (GBI) gold rated, and sees 25 -30% energy costs savings due to efficient systems and passive building design elements.

TRX Image source: Wiki Commons

Closing the green buildings gap: opportunities for Landlords

There is an immense opportunity for asset owners and landlords to address the growing demand for high quality sustainable office spaces. The impending low-carbon office supply demand imbalance presents a strong case for asset owners to develop sustainable properties that cater to the market's needs. Moreover, JLL ‘s analysis indicates that rental rates for green buildings in the Kuala Lumpur market will outpace those for non-green buildings, instilling confidence in landlords for better return on investment. By constructing low-carbon buildings with high grade sustainability credentials, landlords can attract occupants seeking green office spaces. This will help mitigate the supply-demand imbalance and offer more options to prospective tenants.

Nonetheless, existing buildings represent the majority of building stock compared to new developments. In Kuala Lumpur, 6 out of 10 current grade A office buildings are over 15 years old. As these buildings age, they will no longer meet increasingly stringent building and energy codes, creating an opportunity for retrofitting the existing stock to align with sustainability standards. Landlords can explore asset enhancement initiatives by conducting building assessments and incorporating green building retrofits e.g. energy and water efficiency systems. Moving beyond green design credentials, truly green offices will require demonstrating sustainability performance during building operations.

Concerns surrounding market confidence and tenants’ cost considerations present hurdles for landlords in the Kuala Lumpur office market, as tenants may be hesitant to pay substantial rental premiums for greener office spaces. Accordingly, ongoing dialogue and collaboration are crucial to communicate the benefits of green buildings which are multifold and outweigh cost considerations in the long term. These include decarbonizing their portfolio to meet their organizational net zero carbon targets, enhancing branding and prestige, achieving operational cost savings and improving occupant health and wellbeing. 

Ultimately, Kuala Lumpur's commercial real estate market is witnessing a vibrant shift towards sustainability, with green office spaces becoming increasingly popular among occupiers. However, the looming scarcity of net-zero carbon-ready office spaces poses a significant challenge. Occupiers and owners must seize the opportunities presented by the green office momentum in Kuala Lumpur and work together to bridge the deficit and achieve their net zero goals.