The HKMC’s lease at Two Harbour Square helped boost the market in August
Hong Kong’s beleaguered Grade A office market continued to face rising vacancies and falling rents in August, although the emptying out of Central and other core districts of the city showed signs of slowing, according to a report released earlier this month.
Tenants occupied 147,500 square feet (13,703 square metres) less of grade A office space by the end of August than they had at the close of the previous month, according to the latest Property Market Monitor report released by JLL.
August marked the 13th straight month of tenant retreat from the city’s famously pricey corporate accommodations, with landlords reacting by lowering rents in the face of climbing vacancy. Although JLL sees signs that the lower prices may be luring some occupiers back into the market to hunt for bargains.
“More businesses are actively in the market looking at their real estate needs in the second half of the year, albeit cost saving remains a key consideration, said Alex Barnes, head of markets at JLL in Hong Kong. “The reduction in rent has encouraged some isolated upgrading activity in Central, and is likely to continue to do so towards the end of 2020 and in 2021.”
Central Keeps Sliding
The biggest rental drop across Hong Kong’s core commercial districts during August was recorded in Central, where rates for offices fell by 2.5 percent compared to the previous month, according to JLL’s figures.
Alex Barnes of JLL
That decline in rents in Central may have helped pave the way for a pair of New York-based law firms to upgrade their premises in the district during August, with sources confirming to Mingtiandi that Sullivan & Cromwell signed up to shift from 9 Queen’s Road Central to new offices at Hongkong Land’s Alexandra House.
Fellow NYC firm Paul, Weiss also opted for an office in a Hongkong Land property, signing a deal to move from the Hong Kong Club Tower to The Landmark’s Gloucester Tower,
Those moves, however, did not stop Hong Kong’s priciest office district from reaching its highest vacancy rate since 2005, with 6.0 percent of Central office space now yearning for a well-heeled tenant in need of a showy address. That figure was up from the 5.7 percent level reached a month earlier.
Much of that vacancy comes from cash-strapped tenants surrendering leases or parts of their premises in the Greater Central area, where rents averaged HK$115.7 ($15) per square foot per month during the second quarter of this year, according to data from Cushman & Wakefield.
Surrender space in the submarket continued to increase, amounting to about 520,000 square feet of net floor area and breaching the 500,000 square foot mark for the first time since October 2002. That amount of surrender space is now equal to 2.2 percent of the Grade A office stock in Central, according to JLL.
Decline Slows in August
While Hong Kong’s office market has yet to show signs of recovering, after more than a year of decline, the rate of downward movement may be slowing, according to JLL’s statistics.
Compared to July, rents city-wide fell by 1.7 percent last month — a rate which was below the 2.0 percent average recorded over the first six months of the year, although it still exceeded the 0.9 percent month on month decline in July.
While 147,500 square feet of offices became unoccupied during the month, this represented the slowest growth in negative absorption so far in 2020, according to JLL That slowing rate of decline was bolstered by a 10 percent increase in the amount of office space leased during August, compared to July.
Office Diaspora Continues
A chunk of that increase in activity came from a single lease, the Hong Kong Mortgage Corporation’s contract to occupy 70,000 square feet at Sun Hung Kai Properties’ Two Harbour Square in Kowloon East.
The lease by the government bureau, which was the second largest so far in 2020, fits into a pattern of occupiers relocating away from expensive areas in Hong Kong’s traditional commercial hubs to emerging districts.
The HKMC currently occupies 60,000 square feet in the Cosco Tower, which is part of the Grand Millennium Plaza complex just west of Central district’s prime office area.
Rents in the government organisation’s current home on Queen’s Road start at approximately $43 per square foot per month, ranging up to $80 according to JLL, with the HKMC occupying a mid-zone space on the 34th floor. The HKMC is reported to be paying HK$28 per square foot per month in Kowloon East.
In a statement accompanying its report, JLL explained this growing willingness among Hong Kong occupiers to venture beyond downtown locations as being largely driven by an economic considerations, noting that, “Outward movement from Central continued as tenants remained firmly in cost-saving mode.”
Incentives Drive New Leasing
According to Nelson Wong, head of research at JLL in Greater China, landlords have also been more willing to incentivise leases in recent months, throwing in longer rent-free periods, and to enter negotiations aimed at lowering tenants’ fit-out costs and bringing down capex.
In addition to lower rents, corporate occupiers are increasingly able to win long-term renewals or extensions from landlords who are suddenly willing to bargain, according to Cushman & Wakefield’s head of research for Hong Kong, Reed Hatcher.
“We’re seeing [leases] being extended in the current environment, with six to nine years not uncommon. Landlords especially are keen to extend them past 2022 and 2023 when a significant amount of new supply is set to hit the market and competition is expected to intensify.”
Much of Central probably contains the least sustainable office buildings in Hong Kong.
HK Land and others must get on with extensive retrofitting. ESG requirements of tenants demand it and, among other things, it’s a key pillar of talent retention strategies.