Office vacancies drop to lowest level in 20 years

The economic slowdown hasn’t dampened demand for office space in Hong Kong.

Office market vacancies fell to its lowest recorded figure in 20 years this March, said property services firm Jones Lang LaSalle. The overall market vacancy rate reached 3.8% last month, below the 4% recorded when the market peaked in April 2008.

Against the backdrop of the 6 million square feet growth in stock between 2008 and today, this trend highlights the continued demand for space in Hong Kong despite the prevailing slowdown in leasing activity as a result of the global economic uncertainties.

The overall market registered a positive net take-up of 697,100 sq ft in 1Q 2012, but this was largely inflated by the realization of pre-committed space in the newly completed Hysan Place, 55 King Yip Road and 18 Kowloon East.

Though Central has registered a negative net take-up in 1Q12, its vacancy rate remains at below the 5% mark, which is a very tight level according to current international standards.

“Demand for office space in Central was driven mainly by small-scale expansions and new set-ups from the legal and finance sectors, with requirements of typically 5,000 sq ft or less,” said Ben Dickinson, Regional Director and Head of Tenant Representation.

On the other hand, demand for Grade A1 quality office space remained relatively weak. Considerable leasing activity was seen in other sub-markets driven by cost-saving relocations and upgrading requirements from non-Grade A properties.

The climb in Central vacancy is offset largely by the continuous drop in Kowloon East vacancy, which is now down to 5.4%. There are currently no submarkets with vacancy rates at above 6%.

Dickinson said that with occupancy generally limited, the majority of landlords are not under great pressure to reduce rents.

Looking forward, an increasing amount of returning stock will come into the market from the banking and finance sectors while tenants from the legal, IT, small hedge funds and retail sectors continue to seek quality office space at affordable prices.

The office market fundamentals in Hong Kong remain very healthy despite the fact Central is expected to face continued migration pressure from tenants in the near future. Once the global economic outlook stabilises, rentals are likely to rebound quickly.