HK’s Slumping Office Rents May Lead To Market Recovery

HONG KONG – The territory’s sharp decline in office rents could lead to a market recovery as the downtrend could make Hong Kong’s offices more competitive, according to an opinion piece published by the South China Morning Post (SCMP) on Tuesday (22 December).

Nicholas Spiro – a regular commentator and a partner at Lauressa Advisory, a specialist property and macroeconomic advisory firm based in London – believes that while market data currently paints a bleak picture of Hong Kong’s office leasing market, something positive could come out of it.

He pointed out that recent data from Cushman & Wakefield (C&W) shows office rents across all districts in the Chinese territory fell by nearly 19 percent on average, while vacancy level increased to a near 16-year high of 12 percent.

Hong Kong’s Central district, which is deemed as the most expensive office market in the world, was especially significantly affected, with vacancy rate rising to 10.5 percent and office rent plunging by over 21 percent.

“In prime Central – which C&W defines as the 12 highest-quality buildings in greater Central – rents have fallen 30 percent from their peak in the first quarter of 2019. A quadruple whammy of China’s slowdown, the trade war, Hong Kong’s recession and the COVID-19 pandemic has brought about the sharpest rental correction among the world’s leading office markets since the 2008 financial crash,” noted Spiro.

“However, for a market whose exorbitant rents made it an outlier even among the world’s priciest office markets, Central was long overdue for a meaningful adjustment. Although the district remains the world’s most expensive office market, it no longer sticks out like a sore thumb.”

The aforementioned shocks over the last 3 years have made the territory’s central business district (CBD) more competitive versus its regional and global peers. Spiro noted that based on JLL’s latest Premium Office Rent Tracker Report that was published on 9 December, office occupancy costs in Central have fallen by up to 32 percent year-on-year. Office occupancy costs include rents, service charges & government taxes. Consequently, office occupancy in Central is now equivalent with that of New York’s Midtown.

“While this is nothing to boast about, given that Manhattan itself is among the most expensive office markets, Central is also closing the gap with London’s West End, Beijing’s Finance Street and Tokyo’s Marunouchi district,” said the economics expert.

As C&W foresees that office rents in greater Central could decline by an additional 13 to 18 percent by 2021, Spiro thinks that the sizeable rental drop could help stimulate leasing activity once the market recovers.

“This will create a stronger incentive for occupiers to upgrade and relocate within the submarket, particularly with nearly 1 million sq ft of new supply expected to be delivered in 2023,” he said.

Apart from the declining office rents, Spiro added that other factors that could lead to a revival in leasing and investment activity is the improved connectivity, renewed mainland Chinese interest in Hong Kong, and the availability of more affordable decentralised offices with better specifications like those in Hong Kong East.