When it comes to the performance of rents, Hong Kong’s Central district , the world’s most expensive office market, sticks out like a sore thumb. In the first quarter of this year, rents for Grade A office space in Central plunged 9.2 per cent quarter on quarter, according to data from JLL. Among the 27 office markets in the Asia-Pacific region tracked by the adviser, only Beijing, other than Hong Kong, suffered a decline of more than 2 per cent, while several cities in Australia and Japan even enjoyed sizeable increases despite the Covid-19 pandemic. Over the past two years, Hong Kong’s office market has faced a succession of external and domestic shocks, which tipped the economy into recession in the third quarter of 2019, leaving the sector in a much more vulnerable position when the rapid spread of the virus outside China caused a collapse in the global economy. Last quarter, the net absorption of office space was negative for the second straight quarter, the first back-to-back declines in net take-up since the 2008 financial crisis, according to data from CBRE. In Central, which has borne the brunt of the collapse in leasing activity due to its sky-high rents and the sharp fall in demand from mainland firms, the net withdrawal of space last month reached its highest level in over a year, accounting for nearly 60 per cent of the overall drop in net take-up, data from JLL shows. In a sign of the severity of the contraction in demand, a growing number of high-profile tenants are surrendering their leases. Earlier this month, Mingtiandi, the Asian property news website, reported that online travel agency Expedia was giving up its 25,000 square feet office in The Center. This followed a report in the Post revealing that Australian investment bank Macquarie is surrendering a portion of the space it leases at One IFC, one of the most prestigious business addresses in Hong Kong. According to data from Cushman & Wakefield (C&W), the stock of surrenders surged 36 per cent quarter on quarter in the first two months of the second quarter, to 505,000 square feet, bringing the total stock since C&W began tracking surrenders in the third quarter of 2019 to 1.5 million square feet. Some two-thirds of the surrendered space is in expensive core locations, with Central alone accounting for a third of the stock. Reed Hatcher, head of research at C&W in Hong Kong, notes that “cost savings are certainly at the heart of it for many companies”, adding that “it’s a significant trend that’s likely to continue over the next 12 months at least as the impact from Covid-19 washes through the system”. The steep decline in leasing activity is not confined to core districts. Relocations to cheaper, decentralised submarkets – previously a crucial source of demand as the economy slowed – have also fallen sharply. According to data from CBRE, net take-up of office space in Hong Kong East (the main beneficiary of relocation demand in recent quarters) in the first quarter shrank by 63,800 square feet, compared with a rise of 176,300 sq ft as recently as the third quarter of last year. As the recession forces companies to put their property requirements on hold and focus on preserving capital, and as the mass homeworking experiment compels occupiers to embrace more flexible work practices, Hong Kong’s office market, in particular Central, has hit a major inflection point. While the short-term outlook for the sector remains bleak, the sharp decline in rents in Central – JLL expects them to drop a further 25 to 30 per cent this year, having fallen more than 6 per cent in the second half of last year – could, if sustained, help lay the foundations for a healthier and more competitive office market offering a wider range of choice to occupiers in both core and non-core districts. As Hong Kong tenants call the shots, can work-from-home dent office market? One of the consequences of the plunge in rents in Central is a reduction in the gap between the district’s occupancy costs and those in decentralised areas, notably in Hong Kong East. According to a report published by Colliers last week, the price differential has narrowed since last year and is expected to decline further in the next two years. The combination of an increase in supply in Central in the coming years and a narrower rental gap could provide opportunities for tenants in non-core districts to relocate back to Central. Moreover, cheaper rents in Hong Kong’s central business district could help stimulate demand from mainland firms. “We believe [more opportunities] could open up in the CBD area again,” says Rosanna Tang, Colliers’ head of research in Hong Kong. However, the case for further decentralisation remains strong. Not only is the difference in occupancy costs between Central and non-core districts big enough to entice cost-sensitive occupiers to relocate, buildings in decentralised areas, notably in Kowloon East, are much younger and built to significantly higher standards. While the domestic and external factors that are responsible for the steep fall in rents in Central are a cause of concern, and could persist for longer than many anticipate, Hong Kong’s office market has been crying out for lower rents for years. When the recovery materialises, this could be the catalyst for a stronger and more durable upturn. Nicholas Spiro is a partner at Lauressa Advisory