Hong Kong Grade A Office Rents Seen Falling Another 5-10% in 2024

After declining by 5.3 percent this year, Grade A office rents in Hong Kong are likely to tumble another 5 to 10 percent in 2024 as high interest rates and a global economic slowdown continue to challenge the leasing market, according to JLL.

Kowloon’s Tsim Sha Tsui managed to hold rents steady in 2023 to become the only commercial hub in the city to avoid a decline this year, while rates in the prime Central district dove 6.4 percent and Hong Kong East weathered a 7.9 percent plunge, the property consultancy said in a release. All figures reflect preliminary data as of the end of November.

Grade A offices are expected to remain a tenant’s market next year, with large occupiers seizing opportunities to upgrade from their current corporate homes or consolidate teams as large blocks of space become available in newly completed projects, said Sam Gourlay, JLL’s head of office leasing advisory for Hong Kong Island.

“We expect to see more large space transactions next year,” Gourlay said. “With the completion of new and high-quality projects in 2023 and 2024, tenants in need of multiple floors will have a rare opportunity to choose from a diverse range of premium options.”

Mainland Boosts Central

Grade A office vacancy rose to 12.9 percent by the end of 2023, with 9.9 percent of Central space sitting empty. In a hopeful sign, total surrendered office space in the five biggest submarkets fell 27.2 percent year-on-year to 552,000 square feet (51,282 square metres) of net floor area, indicating a deceleration in the corporate downsizing trend, JLL said.

Demand from mainland firms powered much of the office take-up in Central, with Chinese tenants accounting for 22 percent of total leasing volume in the district — up from 6 percent in 2022.

Some 57 percent of new lettings and expansions in 2023 were for spaces of 10,000 square feet or less, up from 39 percent in 2019, signalling a market driven primarily by small and medium-sized occupiers.

“Anchor tenants can enjoy an expanded and significant rental discount (in 2024) compared to small-scale occupiers, along with greater flexibility than we have seen in previous cycles,” Gourlay said.

Reopening Fails to Deliver

Among the few large-scale leases in 2023 were banking giant Citi’s take-up of a further 28,500 square feet of net floor area at Champion REIT’s Three Garden Road in Central and insurer FWD’s rental of 49,000 square feet at Swire Properties’ Devon House in Taikoo Place, according to Cushman & Wakefield data. Both deals were signed in the second quarter.

In its own year-end review, Cushman predicted a 7 to 9 percent drop in office rents for 2024, after leasing momentum recovered more slowly than expected following this year’s reopening of Hong Kong’s border with mainland China.

“If accounting for the remaining new supply potentially to be completed before 2023 year-end, the availability rate could surpass 19 percent by then, exceeding the record high of 18.1 percent in Q1 2004,” said John Siu, managing director and head of project and occupier services for Hong Kong at Cushman & Wakefield.

Knight Frank expects vacancy in Central to climb to an “unprecedented high level” in 2024 with the entry of 1.2 million square feet of new floor space in the CBD.

“ ‘Flight-to-quality’ trend will continue, as occupiers capitalise on falling rents for office or location upgrades,” said Wendy Lau, Knight Frank’s head of Hong Kong office strategy and solutions. “However, given the global and local economic conditions, as well as the absence of positive news from Chinese mainland, office leasing demand is expected to remain subdued in 2024 in the absence of stimulus.”

Knight Frank forecasts a 3 percent drop in Hong Kong Island office rents in 2024.