Hong Kong Office Rents Fell 2.2% in May as Vacancies Reached 12-Year High

With uncertainty plaguing Hong Kong’s economy as political unrest and the lingering effect of the coronavirus pandemic continues to hamper business, rents slid 2.2 percent in May and vacancies reached numbers not seen since the global financial crisis of 2008.

Average grade A office rents across Hong Kong dropped to HK$64.50 ($8.32) per square foot per month in May, down from about HK$65.90 per square foot in April, according to property consultancy JLL. Figures from Colliers International show that rents last month fell to their lowest levels since February 2006.

Landlords Lower Expectations

In a report published on Monday, JLL analysts noted that, as businesses sought smaller and more affordable options, Hong Kong’s grade A office market suffered negative net absorption of 196,500 square feet (18,255 square metres) in May. Cost-cutting for some companies came by relocating from the pricier submarkets in the center of the city. For others, it came by downsizing within the same submarkets.

While the office market has yet to recover, JLL brokers noted higher levels of activity as property owners and operators adjusted their expectations.

“Rising vacancy continued to exert pressure on rents, but the decline was milder than in previous months,” said Alex Barnes, Head of Markets at JLL in Hong Kong. “As uncertainties persisted and landlords became more willing to lower their rental expectations, tenants tended to renew their leases in order to save on capital expenditure.”

In Central, home of the most expensive commercial property in the world, rents fell 2.7 percent from the previous month and vacancy reached 5 percent. The proportion of empty offices in the city’s traditional business hub is now up 120 percent from May 2019, per JLL data.

Vacancy in the city as a whole rose from 7.2 to 7.4 percent from April to May, which each of Hong Kong’s core office locations beyond Central also suffered growing amounts of empty offices. On Hong Kong island, the percentage of offices going unused in Wanchai and Causeway Bay grew from 5.8 to 6.1 percent in the interval, while in Hong Kong East vacancy grew from 3.3 to 3.6 percent.

Across the harbour in Kowloon, Tsim Sha Tsui saw vacancy rise from 6.2 in April to 6.5 percent last month and in Kowloon East the amount of empty desk space grew from 13.6 to 13.7 percent over the same period.

Small-Scale Transactions

Amid uncertainty in the slow leasing market, JLL pointed out some of May’s most noteworthy new leases were signed in areas away from the city’s traditional commercial core. A pair of finance firms leased a combined 18,900 square feet (1756 square meters) at Lee Garden Three in Causeway Bay at around HK$70 to HK$75 per square foot, to relocate out of the traditional business district.

On the investment side, values for strata-title office space also showed signs of weakness. During May, Richer Holdings Limited sold a small unit on a low zone floor of China Merchants Tower in Sheung Wan for HK$37.7 million. The HK$22,600 ($2,916.04) per square foot price for that property in the Macau ferry terminal complex was the lowest recorded for the building in nearly four years.

An Uncertain Office Future

Grade A office rents will likely face further downward pressure in the remainder of the year, said Nelson Wong, head of research at JLL in Greater China.

Reed Hatcher, Cushman & Wakefield’s head of research in Hong Kong also predicted in April that rents would fall 13 to 18 percent from March levels by the end of 2020.

Both analysts cited the effects of the coronavirus and political uncertainty as main reasons that the grade A office market will get worse before it gets better.

“As the outbreak further contributed to an uncertain outlook following last year’s social unrest, there were an increasing number of cases of firms downsizing in the quarter,” Hatcher wrote. “Notable examples included companies within the finance, insurance, and co-working sectors.”