The outlook for Hong Kong’s prime-office market is bleak due to the impact of the COVID-19 pandemic — after overall rents for grade A office space rapidly declined in the first quarter of 2020 and availability climbed to a 10-year high.
Office rents in Hong Kong plunged 4.1 percent quarter-on-quarter to HK$70 per square foot on average in the first three months of 2020, property consultant Cushman & Wakefield said on Tuesday.
Leasing demand is expected to remain weak in the next nine months to one year. ... office rents could drop 13 percent to 18 percent at the end of the year, while those in Central could fall as much as 20 percent
John Siu, managing director of Cushman & Wakefield (Hong Kong)
Core areas have been hit the hardest with office rents in greater Central — including Central, Admiralty and Sheung Wan — falling by 4.1 percent compared with the fourth quarter last year.
Leasing demand is expected to remain weak in the next nine months to one year, said John Siu, managing director of Cushman & Wakefield (Hong Kong). He forecast office rents could drop 13 percent to 18 percent at the end of the year, while those in Central could fall as much as 20 percent.
The property consultant said corporation tenants were generally holding off any expansion plans in the face of such uncertainty. Meanwhile, the pandemic has forced people to try remote or flexible work. Thus, some tenants will consider the viability of reducing eased space to save costs, while maintaining operations, he explained. Cushman & Wakefield expect these considerations will further undermine leasing demand and the amount of net absorption in the near future.
Net absorption — a measure of the net change in commercial office space supply — dropped from minus 377,990 square feet in the fourth quarter of last year to minus 524,947 square feet in first quarter of the year, the worst in 18 years. It indicates that space which has become physically vacant is far more than the amount occupied.
With leasing demand shrinking, overall availability climbed to 10 percent — the highest level in a decade. Siu said the 10 percent level is a benchmark showing the market is becoming more tenant-friendly. Landlords will become more concerned about back filling vacant space in their buildings. In this situation, rents are not likely to go up much.
Siu forecasts overall availability would remain at 10 percent or 11 percent in the remaining months of 2020, as there will be no prime office buildings completed this year.
Separately, rents for high streets are also under growing pressure. Central district saw an almost 20 percent decrease in high street shop rents quarter-on-quarter, while commercial rents in Causeway Bay, Tsim Sha Tsui and Mong Kok were down by 15 percent.
Kevin Lam, head of retail services at Cushman & Wakefield (Hong Kong), forecast commercial rents in Causeway Bay could fall 35 percent to 40 percent in the first half compared with the same period last year.
Seeing many international luxury brands closing down their flagship stores in Hong Kong, Lam said many brands will refuse to renew leases when they expire this year, as their sales cannot not support the high rents.
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