As businesses across Hong Kong resume operations, landlords will face new challenges from prospective tenants whose office-space requirements have changed in the wake of COVID-19. Sophie He reports from Hong Kong.
The coronavirus pandemic may have created a lasting or, at least, immediate impact on the way businesses in Hong Kong operate — changing the office-rental landscape by disrupting the working structure for employees with social distancing rules and fueling the practice of working from home.
Grade-A offices in Central — one of the most expensive office locations in the world — has seen the vacancy rate climb to above 4 percent, and rentals sliced 15 percent from their recent highs, according to local real-estate advisory companies.
Although industry experts say it’s still “too early” to say whether commercial office rentals have been permanently altered by the pandemic, the mentality of tenants and their demands are definitely changing.
Leasing demand has been moderate over the past few months (in Hong Kong) as tenants adopt a wait-and-see attitude
Nelson Wong, head of research for Greater China at JLL
The disruption in Hong Kong’s office rental sector has been severe in the past few months as the fallout from the outbreak became more apparent, Marcos Chan, executive director and head of research of the Greater Bay Area and Hong Kong at CBRE, told China Daily.
He noted that currently, the vacancy rate of Grade-A offices in Central stands at about 4.1 percent — from a “ridiculously low” level of 1 percent two years ago — while rentals have dropped by about 15 percent compared with the second quarter of last year.
Stressing that a 4.1 percent vacancy rate is still “extremely low” compared to that in major Chinese mainland cities, CBRE noted that the situation has been gradually improving in the past few weeks, at least in terms of inspection activity and the number of inquiries made. Chan said prospective clients may just call up brokers for more information, while clients who are more serious may opt to make physical visits to properties they might be interested in.
But it’s still too early to conclude that the scenario in the top-grade commercial office rental sector has been permanently changed, or if the vacancy rates will continue to pick up and rental rates in the Central district will stay low.
Decentralization
“One thing is certain — companies will definitely continue to consider work-from-home as an option or working remotely. We ourselves have introduced some social distancing policies as well,” Chan said.
He believes that going forward, more enterprises will weigh the option of having split offices, rather than having everyone in the same place. They might consider having a primary office in the Central — the city’s central business district, backed by satellite offices in decentralized locations.
CBRE, which has offices at the Exchange Square in Central and The Gateway in Tsim Sha Tsui, has rented a satellite office at the International Trade Tower in Ngau Tau Kok, Kowloon.
The pandemic has also made tenants more fastidious about hygiene standards in a building, with a focus on social distancing, and a larger, cleaner, more-sophisticated restroom system, for instance, Chan said.
Nelson Wong, head of research for Greater China at JLL, sees decentralization as a more cost-effective option that will remain a key trend this year as tenants put the brakes on operating costs in these uncertain times.
He noted that leasing demand has been moderate over the past few months as tenants adopt a wait-and-see attitude. The rental decline in the overall office market continued to worsen in the first quarter of this year as a result of higher vacancy rates across all major office submarkets amid poor demand, Wong said.
“The COVID-19 outbreak has created more uncertainties in business, casting a shadow on the real-estate plans of corporation. We see a cycle of moderating leasing activity in Hong Kong with short-term cost rationalization overtaking long-term planning,” Wong told China Daily.
Flexible adaptation
However, it’s probably still too early to discern any distinct trend arising from the pandemic. Many companies are still focusing on negotiating immediate or near-term liquidity solutions. For the longer term, occupiers will increasingly seek premises that offer superior mechanical and electrical provisions (such as filtration systems) and high sanitation standards to provide a safe and healthy working environment, he said.
The work-from-home arrangement is being tested extensively during the pandemic. Corporate real-estate planners will need to assess the impact on overall productivity, team dynamics, workforce preferences, hardware and software capability, and how to strike a balance
A correction in Hong Kong office rents would be a welcome relief for tenants, as rents have been on a prolonged uptrend since 2014.
Don Taylor, director of the office portfolio at Swire Properties — one of Hong Kong’s biggest landlords — said the group continues to see high occupancy in their core office properties at Taikoo Place and Pacific Place, and rental adjustments are positive.
“Having said that, the general demand for office properties in Hong Kong has continued to weaken, which is exerting pressure on rentals. This is due to the multiple headwinds of the US-Sino trade dispute, COVID-19, and the recent social unrest,” he said.
COVID-19 has shown how businesses and landlords need to be adaptable, and ready to act quickly to deal with unforeseen circumstances, he said. “With the pandemic, we see companies trying out flexible and remote working arrangements. Some have also opted to send a certain percentage of their workforce to work from satellite offices.”
Swire Properties itself has enforced “A” and “B” separation plans, allowing some teams to work in private offices at the group’s coworking hub Blueprint in Taikoo Place. “The office space diversity across our portfolios has allowed us to cater to different demands from companies looking for flexible workspaces during this period,” Taylor said.
Contact the writer at sophiehe@chinadailyhk.com
