Several unique factors, topped off by the enduring trend to working from home and an exodus of companies.
Office demand in Hong Kong, one of the world’s most expensive property markets, remains “extremely weak,” says Cushman & Wakefield. More and more companies are allowing a larger percentage of their workforce to work from home on a long-term basis, reducing their office space needs. By the end of last year, overall net absorption — the sum of square feet that became physically occupied, minus the sum of square feet that became physically vacant — of Grade-A office space had slumped to -2.3 million square foot, the steepest annual drop on record.
Many companies are downsizing as their need for space shrinks. Homegrown luxury goods company Lane Crawford relinquished 19,400 sq ft at One Island South in Wong Chuk Hang. FTLife Insurance released an entire floor (16,500 sq ft) of the FTLife Tower in Kowloon Bay. DHL reportedly leased 90,900 sq ft at International Trade Tower in Kwun Tong, downsizing and relocating from Kowloon Bay.
Coworkers’ centers like WeWork and Regus also scaled back their presence in the city for the first time since 2016, according to CBRE. While some closures were planned before the pandemic, new lettings by coworking centers shrank by 39% year-over-year in 2020. At the same time, travel restrictions led to a sharp fall in new leasing demand from mainland Chinese firms, which plunged by 74% year-over-year and 62% from 2018 and 2019, respectively.
In other words, a lot more office space is hitting the market than is leaving it. Total vacant office space rose to 8.12 msf in the fourth quarter, up 69% year over year. “A rising amount of surrender and sublet space” pushed the availability rate for all grade office buildings one percentage point higher to 12.6%, up from 8.8% in Q4 2019, says Cushman & Wakefield. “It’s the highest level since Q1 2005.”
In Q1 2005, Hong Kong’s commercial real estate sector was emerging from the debris of the first SARS pandemic (2002-04). After being identified by W.H.O. as one of the areas affected by the virus, investment sentiment and activity in the city froze. Office prices dropped around 15% in 2003. Grade A office rents in the city declined by 17.2%. Central Business District, home to some of the most expensive commercial real estate, dropped 22.5% year-on-year. Yet even at the height of the SARS crisis, Hong Kong’s GDP grew by 3.1% in 2003 and 8.7% in 2004. And that helped pave the way for a strong recovery of the commercial real estate sector.
Things are very different this time. The city has so far racked up five consecutive quarters of economic decline, from the third quarter of 2019 to the third quarter of 2020 (the figures for the fourth quarter haven’t yet been published). Hong Kong is now in the grip of its worst recession on record…
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Nick Corbishley 