Hong Kong Office Vacancy Hits Record High of 13.6% as Occupiers Move to Downsize

Office vacancy in Hong Kong reached a record high of 13.6 percent at the end of June, as sluggish leasing demand and oversupply drove average office rents in the Asian financial centre down 4.3 percent in the first half of the year, marking a plunge of 36.5 percent from their 2019 peak, according to a report by JLL this week.

Capital values of grade-A offices in the city decreased 5.9 percent in the first half of the year, continuing from a 33.7 percent plunge from year-end 2019 to 31 December 2023, with the consultancy forecasting further value erosion of up to 5 percent in the second half.

The protracted slump comes as a recent Colliers survey of occupiers in the city revealed growing intentions to downsize their office footprint in the city, as companies seek cost savings amid an increasingly pessimistic business outlook.

“Challenging macroeconomic and geopolitical environments are causing businesses in Hong Kong to stay cautious about their business outlook, and in general are seeking ways to streamline their operating costs, including re-evaluation of their office rental and use of office space,” said Fiona Ngan, head of occupier services at Colliers in Hong Kong.

Supply Overhang

Hong Kong saw 631,100 square feet of new office supply enter the market in the second quarter, bringing total vacancy to 15 million square feet as of June, according to a CBRE report published this week.

Central district registered the sharpest jump in vacancy in the first half of any of the city’s main commercial hubs, as unoccupied space rose to 14.0 percent at the end of June from 9.7 percent at the beginning of the year, according to CBRE. The rise in vacancy is due in part to the launch of new office towers including Henderson Land Development’s The Henderson and CK Asset’s Cheung Kong Centre II, which added to an existing overhang.

By the end of June office rents in Central had declined by 40.5 percent from their 2019 peak, according to JLL, with some occupiers taking advantage of the discounts and the influx of new supply to upgrade their existing space or relocate into the prime district. The flow of those bargain deals may be restricted, however, by the prospects for still lower leasing rates in the future.

“Office rents will drop further by 0 percent to 5 percent in the coming six months,” said Paul Yien, executive director of office leasing advisory at JLL. “Despite the large amount of new supply posing pressure on vacancy rates, high-quality new offices equipped with premium specifications, strong ESG credentials, and amenities will be gradually absorbed as the market is dominated by the upgrading demand.”

Rents fell across all of the city’s major office submarkets in the first half, with Central district having fallen the most with a 7.1 percent decline, followed by Hong Kong East with a 4.1 percent drop. Tsim Sha Tsui and the Causeway Bay and Wan Chai submarkets saw the smallest declines with respective declines of 1.5 percent and 1.7 percent over the same period.

Dearth of Deals

With tenant demand suffering, transactions of commercial properties in Hong Kong, including office, retail, industrial and hotel assets, slid 25.6 percent during the first half of the year from the second half of 2023 to hit HK$13.2 billion, the lowest level since 2020. Office investment accounted for roughly a third of that deal flow.

JLL attributed the decline in office investment to a challenging funding environment, including high interest rates, as well as difficulty in obtaining mortgage financing given the high level of vacancy and a weak rental outlook.

“The commercial properties market is currently facing the dual challenges of high interest rates and stringent mortgage loan approvals,” said Eunice Tang, executive director of capital markets at JLL. “This has dampened investment sentiment and consequently led to a decrease in transaction volume. It has contributed to an unhealthy landscape in the market and is further exacerbating the downturn.”