Hong Kong Office Market Contracted Again in June as Central Vacancy Hit 7.4%

Hong Kong’s Grade A office market showed signs of weakness in June, despite leasing activity in Central having doubled in the first half of 2021, according to a report by JLL.

In June, Hong Kong experienced a citywide rise in vacancy with even the city’s commercial core in Central seeing its percentage of empty space rising to 7.4 percent — up from the 7.2 percent reported a month earlier — as tenants vacated offices and the economic outlook remained cloudy.

Despite remaining uncertainty, JLL found some companies venturing into the market as bargains have begun to appear, even in the city’s priciest commercial hubs.

Rents Drop, Vacancy Rebounds

In May, Hong Kong’s office leasing had recovered for the first time since July 2019, only to see vacancy rates rise and rents slide again in the month that followed. Hong Kong’s climbing vacancy rates have put downward pressure on rents, which fell by 0.6 percent in June compared with the preceding month.

The June slide capped another tough quarter for office landlords in the city, with CBRE’s Hong Kong 2021 Mid-Year Market Outlook showing that the net amount of space leased in the second quarter of the year contracted by 322,100 square feet (29,924 square meters) compared with the preceding three months.

Of the major office hubs, Hong Kong East saw the largest decline in rents, despite some noteworthy transactions such as DFS Group taking up 55,500 square feet at Swire’s One Taikoo Place.

Meanwhile, rents in Kowloon East remained relatively stable in June, with online luxury retailer Farfetch helping to drive activity in the up-and-coming commercial hub. The European group accounted for one of the month’s largest deals as it agreed to relocate from an industrial building in Wong Chuk Hang to a 35,750 square foot office space in PAG’s International Trade Tower in Kwun Tong, according to a Knight Frank report.

“While business challenges still exist, a number of tenants have opted to exercise relocation plans amongst general improvement in business sentiment,” said Alex Barnes, head of office leasing advisory at JLL in Hong Kong. “There is notably more relocation activity in the market as the flight to quality continued with more tenants upgrading their office premises.”

The e-commerce giant’s shift to the Kowloon East building was revealed shortly after Canadian financial services company Manulife received attention for leasing 145,000 square feet in the ITT in May.

Despite market weakness citywide, net leasing of office space in Greater Central rose by 64,824 square feet in the second quarter to mark the first increase in take-up since the first three months of 2019, Cushman & Wakefield said in a report.

Among several office expansions, financial services company Citadel leased 23,960 square feet at Two International Finance Centre, and serviced office provider The Executive Centre leased 15,700 square feet in AIA Central on Connaught Road in Central in June.

Henderson Land Starts Leasing

In July, Henderson Land revealed its first lease in The Henderson, a 36-storey commercial tower, which has become the first major office project to enter the Central market in several years after the developer bought a former car park site for HK$23.3 billion ($3 billion) in 2017.

Henderson will be leasing four floors in the tower to UK auction house Christie’s, to be used as the firm’s Asia Pacific headquarters, in its first major tenant deal for the building near the Bank of China Tower and the Cheung Kong Center.

The Henderson is set to be completed in 2023, and the 465,000 square foot tower is expected to generate a fresh surge of leases in Central.

Christie’s APAC president Francis Belin told Reuters that about 30,000 square feet of the 50,000 square foot space will become galleries and sales rooms as the auction house upgrades from its current 7,000 square foot location.