Vacancy in Hong Kong’s normally red-hot Central office market, which boasts the most expensive commercial property in the world, rose to a three-year high in July amid increasing economic uncertainty, according to JLL’s latest Property Market Monitor report.
The property services firm said that delayed expansion plans by corporate tenants, paired with an ongoing shift toward the city’s secondary hubs, had resulted in the market in Hong Kong’s traditional business hub contracting by 56,100 square feet (5,212 square metres), pushing the vacancy rate up from 2.3 percent in June to 2.6 percent last month, the highest it has been in three years.
The jump in empty offices follows nearly three months of protests of a controversial extradition bill that have disrupted the Asian financial hub and lower leasing activity.
“Demand has notably reduced, particularly in Central, as overseas decision makers weigh up increasing global economic woes and the impact to Hong Kong,” said Alex Barnes, head of markets at JLL in Hong Kong.
Central Rents Slip 0.1%
Despite the rising vacancy rate, average net effective rents for grade A offices in Central slipped only 0.1 percent to HK$139.50 ($17.80) per square foot per month in the second quarter of the year compared with the first three months of 2019, according to rival property services firm Colliers International.
JLL’s monitoring of global office occupancy costs – which takes into account rent, taxes and service charges – reveals that Central is still the most expensive place to lease workspace in the world by a wide margin.
Tenants in Hong Kong’s costliest submarket were paying $340 per square foot foot per annum in the first quarter of this year, 62 percent higher than the $212 for second-placed New York’s Midtown, according to JLL.
Barnes said that, despite the huge gap between Hong Kong and other cities, it would take time for declining demand to translate into meaningful rental reduction without a significant spike in vacancy or major new supply.
The veteran broker added that businesses feeling the brunt of economic conditions are unlikely to find a 10-15 percent reduction in Central rents more attractive than significantly cheaper alternatives elsewhere.
Leasing More Active Beyond Central
Despite average office tariffs across the city standing at HK$77.2 per square foot per month for July, only slightly cheaper than the HK$77.3 the month before, JLL said there was a positive net take-up of 75,900 square feet in Hong Kong as a whole, driven by leasing activity outside of Central.
With vacancy rates on the rise, some companies seem to be taking advantage of the drop in demand to negotiate better deals.
Less than two weeks ago, Hong Kong-based Dah Sing Bank agreed to lease a 76,000 square foot space on Queen’s Road East in Wan Chai, east of Central.
The commercial bank’s agreed rent of HK$45 per square foot per month for its new home in the Sunlight Tower is around 50 percent less than the current HK$80 to HK$90 rates the bank is paying for its space in the Everbright Centre.
“Wanchai/Causeway Bay, together with Central, is coming under increasing pressure from flagging demand in core areas amidst a continuing decentralization trend by multinational corporations seeking cost savings,” said Reed Hatcher, head of research at Cushman & Wakefield Hong Kong.
Co-Working Bucks the Trend
Despite the overall downward pressure, demand from co-working operators is bucking the trend, according to JLL’s Alex Barnes.
He predicts that demand in the flexible space market is likely to increase as occupiers become more concerned about business planning, while the bulk requirements from co-working operators mean that landlords will likely hold off on meaningful rental reductions in the short term.
New York co-working giant WeWork is said to have picked up a bulk-lease discount last month when it signed the lease on a 60,000 square foot space in the Hopewell Centre on Wanchai’s Queen’s Road East.
That transaction saw Adam Neumann’s shared office company agreeing to pay HK$45 per square foot per month for four mid-level floors in the circular skyscraper, while average rents in the Wanchai and Causeway Bay submarket stood at $79 per square foot per month in the second quarter of the year, after falling 2.5 percent quarter-on-quarter, according to Colliers.