Mandarin Oriental Launching Causeway Bay Project into Hong Kong Office Headwinds

More than five years after announcing a $650 million plan to redevelop the former Excelsior Hotel into a commercial project set to ride a boom in demand, Hong Kong’s Mandarin Oriental Hotel Group recently announced preparations to begin leasing the 555,000 square foot (51,561 square metre) complex as landlords across the city grapple with office rents which have slid 33.2 percent since their 2019 peak.

Laurent Kleitman, chief executive of Mandarin Oriental Hotel Group, hailed the launch of the company’s One Causeway Bay project as one of Hong Kong’s most prominent undertakings and highlighted its mix of office and retail facilities.

“Upon completion, the complex will not only offer exceptional working spaces for tenants, but also a wide variety of international restaurants and bars to cater for tenants and visitors,” Kleitman said in a release. “The project is due to be completed by the second quarter of 2025 and is set to become a new landmark in the heart of Causeway Bay.”

Mandarin Oriental’s parent company, Jardine Matheson has owned the site of the hotel since 1841, however, that 183 years of history may not have prepared it for the changes in Hong Kong’s office market since 2018, with vacancy across the city now averaging a 20-year high of 15.9 percent at the same time that landlords launch a tsunami of prime office towers into a market where occupiers are cutting staff and trimming physical footprints.

Adding Space to the Sahara

Mandarin Oriental opted for an office tower on the Excelsior site after brushing aside offers which reportedly reached HK$30 billion ($3.8 billion) when it attempted to sell the 869-key hotel in 2017.

However, with the amount of grade A office space under lease to tenants in Hong Kong having contracted by 267,100 square feet in 2023, according to Cushman & Wakefield, the hotel firm faces a market which may fall below any worst-case scenarios specified in spreadsheets seven years ago.

While average vacancy in Causeway Bay and neighbouring Wan Chai district is currently below the citywide average by 3 to 4 percentage points, according to Hong Kong-based CHFT Advisory and Appraisal, Causeway Bay is set to see a wave of new supply.

In addition to One Causeway Bay’s 500,000 square feet (46,452 square metres) of office space, Hysan Development and Chinachem’s Caroline Hill Road project is set to launch 1.1 million square feet of space, including a pair of office towers, in the same district in 2026.

In Hong Kong’s traditional commercial core in Central district, Hongkong Land, the property development and investment unit of Jardine Matheson which has been appointed as asset manager for One Causeway Bay, saw vacancy in its office portfolio rise to 7.4 percent as of December 2023 from 2.9 percent in December 2019.

Analysts see the market getting tougher between now and the time that One Causeway Bay opens its doors, with tenants expecting to give up more space than the amount of fresh leases during this year and next, with rents continuing to slide.

“There were about 3.7 million square feet of grade A office new supply in these two years,” said Vincent Cheung, managing director at Vincorn Consulting and Appraisal. “In view of high vacancy rates and abundant supply of grade A office buildings in the market, we anticipate that a negative net absorption will exist in 2024 and 2025, which will continue to exert pressure on grade A office rents. We forecast another 6 percent to 10 percent rental correction this year. Any leasing work for new spaces in town would be challenging.”

The supply surplus, along with corporate downsizing and a sluggish economic recovery, has driven down office rents in the Asian financial centre, with grade A office rents in Causeway Bay having tumbled 34 percent below 2019 levels, according to JLL.

Despite the challenging outlook, CBRE, which has been appointed as lead leasing agency to provide office leasing and marketing consulting services for One Causeway Bay, pointed to potential tailwinds that could boost office demand in the city this year, including moderating borrowing costs, an influx of professionals on the back of the city’s talent attraction programmes, and the government’s recent announcement of policies to support the housing market.

“CBRE anticipates 2024 having potential improvement in deal flow given better economic sentiment backed by potential interest rate cuts, policy-driven inflow of high-calibre talents and high net worth individuals, pipeline international events, as well as the government’s recent decision to remove property market austerity measures, all of which will promote accelerations in Hong Kong’s economic momentum,” said Ada Fung, head of office advisory and transaction services at CBRE Hong Kong.

Harbourside, Healthy and Sustainable

Located a two-minute walk from the Causeway Bay MTR station at 281 Gloucester Road, One Causeway Bay incorporates 24 floors of office space, with each office level spanning 20,000 square feet in lettable area. The building will also have 55,000 square feet of retail, entertainment and F&B space across a four-level retail podium and two rooftop levels.

The building has achieved platinum-level pre-certifications under the BEAM Plus and LEED ratings for sustainable buildings, and for the WELL system for health workplaces, and is set to incorporate green features including photovoltaics, rainwater harvesting for irrigation and air conditioning use, and an air purification system.

After obtaining redevelopment approval from Hong Kong’s Building Department in 2015, Mandarin Oriental had decided in June 2017 to test buyer interest for the asset as part of a strategic review of the four-star hotel, an exercise that the company reasoned at the time was conducted “in light of the current strong commercial property valuations in Hong Kong.”

“The decision to close the hotel…reflects strong commercial property values in Hong Kong and the expected higher yield associated with a commercial building at a time when the hotel requires significant investment,” Mandarin Oriental said in a 2018 statement announcing the redevelopment decision.

The hotel closed in March 2019 ahead of its demolition, with construction having commenced in September 2020.

The project’s site, known as Lot One, was the first land parcel sold after Hong Kong became a British colony in 1841. Jardine Matheson has owned it since and built the Excelsior on the site in 1973.