Concrete Analysis | Hong Kong’s office market uncertainty and new supply stock create attractive optionality for occupiers
- Vacancy rates have surpassed 10 per cent while rents slumped 22 per cent after seven consecutive quarters of negative net take-up in office space in the city
- Market is expected to reach a cyclical trough in mid-2021, but unlikely to save the year from a negative ending given insufficient demand and rising new stock
The disruptive nature of Covid-19, however, has stymied demand and forced organisations to review their operating models, for what is generally their second largest overhead. In turn this has driven a correction in the market and is potentially creating a long-term shift in occupier requirements.
Waning demand has resulted in a significant market rebalancing. Seven consecutive quarters of negative net take-up have resulted in average vacancy rates rising to 10.1 per cent in March this year from 3.8 per cent in early 2019. Market rents contracted by 22 per cent on average over the period.
As we consider the effect of these changes, the question stakeholders should be asking is whether this is a fundamental change, or just another short-term cyclical correction?
Supply versus demand
Space rationalisation, limited new market entrants and the adoption of work-from-home policies have all resulted in increased optionality from a tenant’s perspective.
Rising vacancy rates are further compounded by record high levels of “shadow stock” (early termination of all, or part of an occupier’s real estate liability), which currently amounts to about 1.8 million sq ft. Arguably Covid-19 has exacerbated pre-existing trends of space rationalisation and optimisation.