Hong Kong Office Market Shrank by 900,000 Square Feet in Q1

Hong Kong’s office leasing market hit some unwelcome milestones in the first quarter of 2021, with net absorption sinking to an all-time low and availability of space reaching its highest level in nearly 17 years, according to research from Cushman & Wakefield.

Net absorption of Grade A office space in the overall market was -899,600 square feet (83,576 square metres) in the initial quarter, deteriorating from -623,700 square feet in the fourth quarter of 2020, the property consultancy said in its latest Hong Kong MarketBeat report. The contraction in the market was equal to tenants giving up more than half of the Two IFC tower in Central.

Against the backdrop of a stubborn COVID-19 wave and several high-profile tenant downsizings, the first-quarter availability rate in the Asian financial hub climbed to 14 percent — a peak since the second quarter of 2004.

Keith Hemshall, executive director and head of office services for Hong Kong at Cushman & Wakefield, said the agency expects the downsizing process to continue for a few more quarters and drive the availability rate further upward until the end of 2022.

“Although we see positive sentiment in Hong Kong building up gradually with vaccination in place, occupiers remained cautious and are still in the process of shopping for more cost-effective office options with favourable lease terms,” Hemshall said.

Seeking a Bottom

During the first quarter, average rentals citywide fell to HK$57.40 ($7.39) per square foot per month from HK$58.50 in the previous quarter. That level was 24.4 percent less than the market peak of HK$75.90 in the first quarter of 2019 and was down 17.6 percent from the same period a year earlier.

Prime properties in Central, which C&W defines as a set of 12 key office buildings in the main business district, saw average rental rates decline to HK$115.30 per square foot, or 21 percent less than a year earlier. In Greater Central, which comprises Central district along with Admiralty and the Sheung Wan area just west of the primary hub, the average was HK$98.30 per square foot — down 21.4 percent from a year earlier.

Among all submarkets, Hong Kong South, which includes the former industrial hub Wong Chuk Hang and Pok Fu Lam, saw the smallest year-on-year decline in average rentals during the first month of the year, with rates falling 10.3 percent to HK$30.40.

Among the forces pushing rents southward was an ongoing wave of tenants handing back office space to their landlords before contracts expired, with a total of 724,000 square feet of office space surrendered in the first quarter. These hand-backs were led by multinationals in consumer products, manufacturing and sourcing (34 percent), followed by banking and finance (23 percent) and professional services and real estate (21 percent), the report said.

C&W’s leadership noted that the number of new projects in the pipeline could increase downward pressure on rentals.

The agency said nine projects in three non-core submarkets are due for completion in 2022, with that 4.2 million square feet of fresh space likely to attract pre-commitments from large occupiers looking for cost-effective alternatives or hoping to find large spaces suitable for consolidating their teams.

“With record high negative net absorption, any new supply coming up in the market is likely to drive further rental decline,” said John Siu, Cushman & Wakefield’s managing director for Hong Kong.

Glimmers of Hope

Despite headlines dominated by big banking names giving back floors, a few leasing deals in recent weeks have held out the prospect of jump-starting Hong Kong’s ailing office market.

Hongkong Land announced this week that S&P Global had moved into a two-floor space in the developer’s Three Exchange Square at the start of this month. The lease, which puts the NYSE-listed financial information firm into 22,000 square feet of space on the third and fourth floors of the 33-storey Central tower, was included in C&W’s first-quarter tabulations.

Earlier this month, Canada-based financial services firm Manulife said its Hong Kong operation had signed a lease agreement for 145,000 square feet of office space in Kowloon East.

The deal, which will see Manulife Hong Kong take up four floors at International Trade Tower, is the city’s biggest in terms of floor area since July 2019 and the biggest since April 2018 in Kowloon East, a historically industrial area undergoing commercial redevelopment.

The pair of deals followed grimmer news of tenant downsizings since the start of 2021, including hand-backs announced by Societe Generale, DBS, Standard Chartered and Deutsche Bank.