As commercial developments continue to expand Phnom Penh’s office space in hopes of capturing the international market, especially with the upcoming integration of the ASEAN Economic Community (AEC), occupancy rates for the first half of this year saw only a marginal increase.

In a recent report by global real estate consultancy Knight Frank, occupancy climbed from 80.9 per cent in the first quarter to 81.3 per cent in the second quarter.

While commercial office space has banked on an increased flow of investment as multinational corporations set up shop looking for prime office space, the report nevertheless saw a slowdown.

According to Knight Frank, this was due to the increased cost of business attributed to the regulatory environment towards taxes, as well as the enforcement of labour permits. Another possible reason it cited was the increase of the minimum wage from $100 to $128 earlier this year.

Additionally, prime vacancy rates from the first half of this year and the last six months of 2014 declined only slightly from 47.2 per cent to 44.2 per cent.

“This was partly attributable to the lack of international companies entering the market and also several companies vacating existing buildings,” the report read.

Kevin Britten, Managing Director of Top Recruitment Cambodia, who has been working in recruitment since 2007, confirmed that there has been an influx of new international companies in the last five years, but noted that “it has not particularly escalated recently.”

While Grade A office space has long been seen as impediment to attracting businesses to the facilities they desire, the 39-storey Vattanac Capital Tower—the sole Grade A office space in Phnom Penh—registered an occupancy of 25 per cent. The report stated that the Grade A demand has subdued with most companies still opting for Grade B and Grade C—recording occupancies of 85 per cent with stable rents.

“I think our clients explore all the options but most of them do not feel a need for high-end office space,” said Britten.

The vacancies in Vattanac Capital Tower have contributed to an overall downward effect on city-wide average occupancy.

While it has been argued that the commercial property market may have not been ready for building of that size, Knight Frank country manager Ross Wheble said that it “is not an indication of the market demand per se.” He noted that the size of the building, 35,400 square metres, is the largest in the country.

Overall, Knight Frank’s research showed that office space will surge by 64 per cent by 2018 when several other projects come online—Exchange Square, Olympia City, GT Tower, City Tower Asia, Maybank’s group headquarters and the expansion of ACLEDA’s headquarters. Grade A will account for 60 per cent of future supply.

These developments will target different customers, thus expanding market segmentation.

“Some developers are targeting large international companies while others are aiming to attract smaller start-up companies, meaning they will not necessarily be in direct competition with one another,” Wheble said.

Most foreign-owned companies presently occupying office space in the Kingdom are from China, Japan, Malaysia, Korea and Singapore, said the report.

Overall, prime office rents grew from $21.6 per square metre to $22.1 over the past year—due to the current level of supply. At the high-end, Grade A presently commands a rental rate of $28 per square metre per month or higher, dependent on space with an additional monthly fee of $5, while at the low-end, Grade C ranges between $9 to $18. In the middle, Grade B is presently at $20 to $25.

Knight Frank predicts that by the end of this year, rental prices may show a slight dip due to more office space entering the market. But as more projects are completed by 2017, “a significant increase in supply may force landlords to review rental prices resulting in lower rental rates across all grades.”

While Wheble said that it may be premature for large-scale office developments, they could compete if the rents are “very competitive.”

“Larger scale projects with a more practical design and basic but modern features could also capture the Grade B and Grade C market. It will be a matter of pricing which, amongst other things, is determined by the design, facilities and the location of the project,” he said.