HK Office Vacancy Hits Record High
HONG KONG – The amount of vacant office space in the city has reached a record high of 13 million sq ft, according to a recent report from Bloomberg.
Based on data from Colliers, the overall vacancy level in Hong Kong’s Grade A office market was nearly 15 percent in April. That’s more than three times higher than the figure recorded in 2019. It also surpasses 4.6 percent in rival Singapore and Manhattan’s 12.5 percent.
For example, Billionaire Li Ka Shing’s trophy asset office property, the Cheung Kong Centre, is 25 percent vacant, while his upcoming commercial property across the street has only managed to attract one occupant. Similarly, Lee Shau Kee’s under-construction The Henderson building is just 30 percent pre-let.
“We just don’t see any positive drivers in the near future,” commented CBRE Group’s Senior Director Eddie Kwok. “Price declines may slow, but it’s difficult for a rebound.”
Unlike in London or New York, office landlords in Hong Kong cannot blame the work from home (WFH) trend for most of their woes, as people in the city prefer to work in the office, with subway ridership already exceeding 2019 levels in March. In comparison, that in New York it is still at 65 percent of pre-COVID figures.
Instead, commercial property owners in Hong Kong are beginning to lose their best clients. Amidst rising tensions between China and the United States, Wall Street banks are reducing expansion plans in the region. And in Hong Kong – where many China-focused bankers do business, with the financial sector leasing nearly 30 percent of the office space – is suffering the consequence of this.
For instance, Morgan Stanley is looking to slash 7 percent of its investment bankers in Asia Pacific after axing around 50 jobs last year. JP Morgan also terminated about 30 investment bankers in Asia, including those assigned in Hong Kong. Banks like BNP Paribas, Standard Chartered, and Deutsche Bank have either surrendered workspaces or relocated from prime office submarkets in the city to reduce costs. Additionally, FedEx is relocating its Asia Pacific HQ to Singapore.
Moreover, CBRE revealed that while Chinese firms like PetroChina and ByteDance are still leasing office space, they made up only 11 percent of new office leases in Q1 2023, versus the average of 15 percent between 2017 and 2019. They also accounted for just 8 percent of commercial property acquisitions during the first three months of the year, down from 19 percent before the COVID-19 pandemic.
Worsening the problem is the huge amount of upcoming supply. Property developers like Henderson Land Development and CK Asset Holdings keep constructing more office developments. CBRE estimates that there will be at least 7 million sq ft of Grade A space entering the market over the next three years. CBRE’s Kwok noted that the annual absorption rate prior to the pandemic was 1.8 million sq ft, hence it will take years to fill up the new office space.
Amidst the record high office vacancy, the number of office deals in Hong Kong almost halved in Q1 2023 from the five-year average, a larger drop than in the US, stated MSCI Real Assets. Prices of posh workspaces also plummeted by 26 per cent in March from their peak in 2018, while office rents declined by 29 percent from 4 years ago.
In a sign of Hong Kong’s troubled office market, Hong Kong-based private equity firm Pamfleet divested a commercial property in Kowloon for HK$350 million (S$60.3 million) in February. Apart from being roughly the same amount it paid for the asset in 2015, it represents a steep discount to its HK$600 million asking price.