With Hong Kong in the grip of the Asian economic crisis and with a large volume of new stock due to come on to the property market during the next year or so, the leasing market is expected to register higher vacancy rates and falling rents. 'The prevailing economic conditions coupled with an increased supply in properties is likely to keep pressure on all sectors of the market in the short to medium term,' a quarterly property analysis from Vigers Hong Kong says. As a result of the downturn, there are official fears that Hong Kong is facing negative economic growth this year. A slumping retail sector, poor prospects for the tourism industry, growing unemployment and the increasingly competitive export market were all having a negative impact on the SAR, analysts said. As this pervading sense of economic reality sinks in, landlords are trying to maintain their existing clients or to entice new customers into their new projects. 'There is a silver lining in all of this doom and gloom for tenants,' Simon Smith, research director with First Pacific Davies, said. 'Tenants can exploit the new infrastructure [new buildings] and consolidate their operations into more highly-specified buildings,' he said. It is now possible to be located in a grade A commercial building and pay grade B rents, and the economic downturn has spawned a new thinking among landlords, according to property agents. 'Existing landlords have had a reality attack in the last couple of months,' Michael McGuire, assistant director with A. G. Wilkinson & Associates, said. 'They have bowed to the pressures of the market.' With so much new supply coming on to the market, particularly in the office sector, developers had been offering prospective tenants 'progressively and increasingly generous rental packages', property agents said. This has led landlords holding older stock to begin slashing rents to maintain their portfolios. According to Mr McGuire and others, this scenario is being played out in all sectors of the leasing market - from office to retail to industrial and warehouse space. In some cases, rents have fallen 50 per cent since the economic crisis last year. By all accounts, many landlords are attempting to salvage face and compensate tenants with generous rent-free periods and help with fit- out costs. Some property agents said this increased competition in the market was having an impact on leasing activity. Mobility among tenants had slackened slightly compared with the first quarter. In the long run, property agents and analysts can only see rents softening in the foreseeable future. However, how far rents might drop depended on the sector, they said. While the retail sector is the worse hit, any cut in rents so far has been strictly on a case by case basis. The largest cuts have been taking place in hotel shopping arcades close to former tourist haunts. Strata-title owners of high street operations are less likely to offer concessions unless the shop is located near a tourist haunt. In the industrial sector, rents have been flat for some time and agents doubt there is much elasticity left in warehouse rents.