At first glance, the performance of Hong Kong’s office leasing market in the first quarter of this year was a continuation of the deteriorating fundamentals that have plagued the sector for the past two years. The signs of weakness – a decline in rents and capital values, rising vacancies, negative net absorption of office space and subdued sentiment – were plain to see. Hong Kong’s office market has now suffered six straight quarters of negative net take-up, while rents have declined for 22 consecutive months. With the government struggling to inject momentum into its Covid-19 vaccination programme , the full reopening of the economy – which requires a relaxation of the city’s strict containment measures – is still some way off, putting more strain on the sector. Yet, as I argued previously, for a market that has suffered a succession of external and domestic shocks over the past three years, and where expectations are so low, it is easy for sentiment to improve if there are signs that activity is picking up. While rents are expected to continue to decline this year amid a further increase in vacancy rates, the occupier market is starting to recover. The deterioration in fundamentals has abated. On a quarter-on-quarter basis, gross leasing activity increased 27 per cent last quarter, the third consecutive quarter of growth, even though net absorption continued to contract, a report published by CBRE on April 15 showed. What is more, Greater Central, which includes Admiralty and Sheung Wan, enjoyed its second straight quarter of positive net absorption. Although the pickup in leasing volumes was flattered by a couple of large transactions, the recovery in demand in the district that was hardest hit – prime rents in Central itself are down 25 per cent from their peak in the second quarter of 2019 – marks a turning point. Although the economic uncertainty and pervasive sense of caution among occupiers have not gone away, leasing sentiment has turned more upbeat as the market becomes increasingly tenant-friendly. “Last year, everyone was on hold. This year, we’re definitely seeing more activity,” says Ada Fung, head of office, advisory and transaction services at CBRE in Hong Kong. The most important catalyst by far has been the sharp rental correction, accentuated by Central’s status as the world’s most expensive office market . While a number of multinational firms, notably in the banking sector, have downsized their office footprints due to pandemic-induced shifts in workplace strategy, others have taken advantage of attractive rental packages and increased availability to relocate to more prestigious locations. A noteworthy transaction, reported in the Post on April 10, was Standard & Poor’s relocation from International Commerce Centre in West Kowloon to Three Exchange Square in Central, one of only a handful of new leases above 10,000 square feet over the past year. Get vaccinated to bring Hong Kong back to a healthy normal, never mind the politics The pandemic has forced landlords, especially those in Central, to become more accommodating in lease negotiations by offering more incentives for renewals and new tenants. For companies whose leases are coming to an end, there are now exceptional opportunities to strike deals with landlords who are struggling to backfill large amounts of vacated space. It is not just the succession of shocks that have turned Central into a more tenant-favourable market. A supply boom in the coming years will constrain the pace of any recovery in rents, reinforcing landlords’ prioritisation of occupancy over rental growth. According to data from Cushman & Wakefield, 43 per cent of the 8.4 million sq ft of new supply to be delivered in the next four years is in core districts, with Greater Central accounting for 11 per cent of the pipeline. The surge in additional supply in Central itself – which has not seen a new large building completed in nearly two decades – will put further pressure on rents, encouraging tenants seeking to upgrade to lease space in trophy buildings. Still, while Hong Kong’s central business district has become more attractive from an occupancy cost standpoint, the rationale for decentralisation – a popular occupier strategy in the city – remains compelling. Even after the plunge in rents in Central, the district is still twice as expensive as Hong Kong East, which is only a 10-to-15-minute train or taxi ride away. Nigel Smith, managing director of Colliers in Hong Kong, says: “Hong Kong does decentralisation like no other city in the world.” Although cost remains a key factor in companies’ decision to lease space outside core districts, the pandemic has turbocharged the flight to quality that has been an increasingly important driver of decentralisation in the city. Boasting significantly younger and high-specification buildings that are better suited to the requirements of occupiers in the post-pandemic world, noncore districts benefit from the stronger focus on the design and performance of properties, as well as the shift to hybrid working. For many companies, Covid-19 has further obviated the need to be based in Central. Hong Kong’s office sector is just beginning to emerge from one of its sharpest downturns. Yet, the marked pickup in leasing activity bodes well for a stronger recovery in the coming quarters, especially if demand from mainland companies gains momentum. The market is not yet out of the woods, but the green shoots are increasingly visible. Nicholas Spiro is a partner at Lauressa Advisory