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4 min read . Updated: 27 Apr 2021, 10:02 PM IST Hong Kong’s economy is finally turning the corner. But it could be years before the city’s once-lucrative office-rental market is back to full health.
Companies are scaling back to cut costs and to adapt to an era of flexible working. That has added strain to a market already roiled by the economic impacts of social unrest, U.S.-China tensions and the pandemic. And a series of new skyscrapers will open for business next year and in 2023, putting further downward pressure on prices.
“It’s survival of the fittest," said Fiona Ngan, head of office services for Hong Kong at Colliers International, adding that newer and better-managed properties had the advantage.
Ms. Ngan forecasts that rents for prime offices in Hong Kong’s downtown Central district will fall about 8% this year. Likewise, other property brokers surveyed by The Wall Street Journal expect falls of between 5% and 10% for high-end rents in Central.
Already, rents have fallen steeply. In February, premium Central office rents went for the equivalent of about $12.70 a square foot a month, according to the most recent available government statistics, down 27% from the June 2019 peak. Rents fell about 10% in 2020.
Simon Smith, head of research and consultancy for the Asia-Pacific region at Savills, said multinational corporations and global banks “have seen an extremely difficult operating environment and are currently looking at ways to cut costs."
Rents are an obvious target. Brokers say they can account for between 10% and 30% of operating costs for companies based in prime locations. As of the end of September, Hong Kong ranked as the world’s most expensive office-leasing market on the basis of all-in occupancy costs, which cover rents, fees and taxes, according to a study by Jones Lang LaSalle Inc. The JLL report is based on a select number of high-end buildings in each city it tracks.
High-end office rents have also retreated in other global hubs. In New York, so-called Class-A asking rents in Manhattan fell 8.6% through 2020, to $90.42 a square foot a year, according to Savills. They declined further in the first quarter of 2021, to $87.68.
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Premium Premium International banks are among the businesses that are cutting costs by reducing office space and embracing flexible working. Financial institutions that have let parts of their leases lapse include Standard Chartered PLC, DBS Group Holdings Ltd., BNP Paribas SA and Société Générale SA, according to the banks and to property brokers.
Outside of finance, VF Corp. is a notable example of a company that is moving offices to other cities. VF owns brands including the North Face and Timberland. The U.S.-listed group is moving its regional center of brand operations to Shanghai to get closer to Chinese consumers, and shifting its product-supply hub to Singapore.
Keith Hemshall, head of office services for Hong Kong at Cushman & Wakefield, said companies surrendered 247,100 square feet of space in the first quarter. He said the availability rate in Central, which counts vacant spaces and leases that are confirmed to be available in the next 12 months, hit 10.3% in the first quarter, the highest since 2004.
Hong Kong’s government forecasts the city’s economy will expand between 3.5% and 5.5% this year, after shrinking by a record 6.1% last year. But new supply could weigh on the market even as economic growth picks up.
Cushman estimates nine new premium office buildings spanning a total of more than 4 million square feet will be available in 2022, and another five buildings will add over 1 million square feet the following year. At present, more than 5.4 million square feet of premium office space is empty, with roughly one-fifth of that in Central, according to Savills.
As rents have fallen, so too have building valuations. As of March, capital values for prime office towers in Hong Kong had dropped 34% from a peak in mid-2018, according to CBRE Group.
Some tenants are using the downturn to expand or move to better locations, said Marcos Chan, head of research for Hong Kong at CBRE. For example, ratings company S&P Global Inc. recently signed a lease to relocate to Central, where it will take two floors of Three Exchange Square, part of the complex that houses the operator of Hong Kong’s stock exchange.
In recent years, Chinese companies, including banks and investment firms, have been a sizable source of new demand, but border restrictions due to the pandemic have stalled this trend in the past year.
Mr. Chan at CBRE said share issuance by Chinese companies would drive demand for office space from investment banks and law firms. “Demand will also get a boost when borders reopen and Chinese enterprises return to invest more," he said.
Mr. Hemshall at Cushman said the churn was good news for corporations. “There’s a lot of fitted space in the market because tenants are moving out and leaving behind their fittings and fixtures," he said. “It’s a really good shopping opportunity for tenants."
Write to Joanne Chiu at joanne.chiu@wsj.com
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