Grade A office rents recorded their worst quarterly performance since Q2/2009, with overall rents falling by 5.2% QoQ in the first quarter of 2020. Both Wanchai / Causeway Bay and Central (-6.2%) recorded the largest rental falls among all sub-markets, followed by Kowloon West (-5.1%) and Tsim Sha Tsui (-4.7%).
• Grade A rents recorded their worst quarterly performance since the 2008/2009 financial crisis
• This is now the third consecutive quarter of rental falls with Q2 rents expected to soften further
• Demand from PRC and co-working firms has slumped while many businesses are looking to downsize and decentralise in order to cut costs
• Whereas previously the retail and hospitality sectors were hardest hit, finance and professional services firms are now also under pressure
Grade A office rents recorded their worst quarterly performance since Q2/2009, with overall rents falling by 5.2% QoQ in the first quarter of 2020. Both Wanchai / Causeway Bay and Central (-6.2%) recorded the largest rental falls among all sub-markets, followed by Kowloon West (-5.1%) and Tsim Sha Tsui (-4.7%).
Decentralisation remains a popular strategy for office tenants looking to cut costs. Given Central’s 80% premium over the rest of the market, there is still strong cost-push pressure on tenants to relocate to other business districts on Hong Kong island. We see a similar trend in Kowloon where tenants are leaving core districts for less prime locations. Downsizing has also been in evidence.
In slightly more positive news, e-commerce firms are thriving as the online environment attracts more patronage after the social unrest and more recently because of the need to limit social contact. We expect to see more office demand from such businesses involved in providing a wide range of services from shopping and tutoring to social media.
The vacancy rate increased sharply during the first quarter of 2020, from 4.65% in December 2019 (2.74 million sq. ft net) to 5.22% in March 2020 (3.08 million sq. ft net). Island East (1.6%) remained the district with the lowest vacancy while vacancy rates in Central and Wanchai / Causeway Bay rose from 3.8% and 4.6% to 4.6% and 5.3% respectively.
Some companies have postponed their Hong Kong IPOs due to the recent stock market sell off and this will affect the rental affordability of financial and professional services firms housed in Central. The retail and hospitality sectors have been hard hit which will negatively affect rental levels and vacancy in non-core areas. Overall Grade A rents are therefore projected to drop by around 20% in 2020, taking account the recent global spread of COVID-19.
Mr. Simon Smith, Senior Director, Research & Consultancy commented: “The global spread of COVID-19, extensive travel restrictions and a stock market sell-off have undermined local office demand and taken rents down sharply in the first quarter.”
Mr. Ricky Lau, Deputy Managing Director and Head of Office Leasing said: “A coin has two sides. Some companies have taken advantage of the market adjustment to actively explore more diversified leasing options, especially companies who already intended to relocate.”