As teargas on Des Voeux Road makes Hong Kong’s pricey office space less attractive to tenants and tighter liquidity on the mainland restrains corporate spending, rents in the Asian financial hub have taken their biggest monthly drop in ten years, according to JLL.
Average grade A office rents across the city dropped to HK$74.30 ($9.50) per square foot per month last month, down 1.6 percent from HK$75.60 per square foot in September.
The biggest fall hit Central, which houses some of the most expensive commercial property in the world, where rents slid last month by 2.3 percent compare to the previous month, falling to HK$122.1 per square foot.
Property agent Knight Frank said that rents in premium offices in the district were 15 percent lower last month than they had been in the same month last year.
Vacancy in HK’s Most Expensive District Tops 3%
The fall in values is driven in part by a mismatch between the number of tenants and the amount of available space, as office vacancy rose across the city in October to an average of 5.8 percent, up from 5.6 percent the month before, as occupier footprints shrank across the city.
“The overall office market recorded a net withdrawal of 188,500 square feet last month, the third consecutive month of negative net absorption recorded across the market,” said Alex Barnes, head of markets at JLL.
Barnes highlighted that leasing demand was focused in decentralised office submarkets in the city where new lettings made up 70 percent of the total city-wide.
In Central, which is traditionally the tightest office market in the city, the vacancy rate rose to 3.3 percent, the first time that the amount of empty desk space has surpassed 3 percent of available supply since March 2015.
According to the property agency, the Central office market recorded negative net absorption of 101,100 square feet in October due to a 49 percent monthly drop in new lettings, as some landlords struggle to backfill whole floors left empty by tenants moving out of the traditional business hub.
Co-Working Fallout Spells Trouble for the City
With reports that WeWork is surrendering leases in the city as it tries to stem its financial losses, the troubles of the co-working giant may reduce the ability of occupiers from the flexible office segment to attract tenants and take up new supply, according to another agency report.
“This issue (the restructuring of WeWork) will inevitably raise tenants’ concern about the financial stability of flexible office operators as they will be more selective when making leasing decisions,” Knight Frank analysts noted in a report issued just three days ago.
Declining rents are also having an impact commercial property investment volumes in Hong Kong, which fell by 32 percent in the third quarter of this year compared with the previous three months, according to Real Capital Analytics.
Slowing Commercial Market Hits Demand for Land
Softening occupier demand may also hit Hong Kong’s Lands Department in its pocketbook, just as the government prepares to sell off a site near the city’s high speed rail terminus that had been expected to attract record bids.
“The tender for the 5.97 hectare commercial site at West Kowloon Station that will close this Friday may be affected,” JLL’s senior director of research in Hong Kong, Cathie Chung, commented.
The site, which is the biggest ever sold in Hong Kong, had been expected to attract bids of around HK$90 billion ($11.5 billion), however, the land sale had only attracted three offers from developers when the tender closed on Friday.