The possibility of Hong Kong running out of office space has always been a topic in my conversations with corporate clients in recent years. Many of these clients started to raise their concerns over Hong Kong’s tight availability of office space a few years back when they saw the city’s overall vacancy rate sitting below the 5% mark, and this was right before the Global Financial Crisis (GFC). They knew, that if the situation was not going to improve, it would affect their future expansion plans.
Since then, unfortunately, the situation has remained largely unchanged, with the city’s overall Grade A office vacancy rate in March squeezed down further to 3.8%. This is not only lower than the level before the GFC, but the lowest in the last 20 years. And yes, such a squeeze is on the back of a gloomy economic environment where corporate expansion demand is not as strong as in recent years.
The times when there were many cheap options in decentralised sub-markets have gone, with vacancy rates in Kowloon East now also down to just over 5%. Although there is some returned space in Central, it is concentrated in a couple of more expensive buildings and does not really meet the appetite of tenants in these uncertain times. The other sub-markets, such as Wanchai/Causeway Bay, Hong Kong East and Tsimshatsui all have vacancy rates below 3%.
I have no crystal ball to tell me exactly when the global financial markets will be restored to health and when there will be a more structural rebound in growth. However, if there are some improvements from next year onwards, as many economists believe there will be, such a low vacancy environment is set to push office rents up further.
This year, we expect to see rents softening with a more noticeable fall only in Central. The rest of the sub-markets, where vacancies are extremely low, will see only very marginal downward rental pressure or, in the case of Kowloon East, some further upward trend. Any downward pressure would be attributable only to a lack of new or expansion demand and not really because of any market contraction. This is very different from the previous down-cycles when there was negative net take-up in most sub-markets.
The shallower rental fall projected this time around compared with the previous down-cycles is very much due to such a low vacancy environment. Although demand for sizable and pricy space is thin and certain buildings in Central with high vacancies will be affected, the lack of leveraging opportunities for tenants in the rest of the market will help prevent rentals from going into free fall.
Is this good for Hong Kong? I guess an immediate answer from office landlords would be ‘yes’, but I do not see this situation as too healthy for Hong Kong as a whole. A lack of office space will not only limit business/economic growth in the long run but will affect Hong Kong’s position as one of the world’s major financial centres.
About the author
Marcos Chan is the Head of Research for Jones Lang LaSalle in Greater Pearl River Delta, based in Hong Kong.