Demand for Grade A office spaces sours amidst slow economy

Leasing demand from co-working centres plunged 63%.

Developers suffered headaches as the leasing demand for Hong Kong’s Grade A office market in 2019 softened despite the delivery of 2.3 million sqft. of new space, according to a CBRE report.

Annual net absorption dropped 86.10% to 403,000 sqft from the 2.9 million sqft recorded in 2018. Net absorption stood at -225,000 sq. ft. in H2 2019.

“Beginning in Q3 2019, corporates turned more cautious as sociopolitical unrest began to affect the business outlook, resulting in many real estate decisions being postponed,” said Ada Choi, head of research at Greater China for CBRE.

The US-China trade conflict, coupled with the depreciation of the RMB, prompted leasing demand from Mainland Chinese companies to decline by 36% YoY in 2019.

Demand from co-working centres was down 63% YoY in 2019, with 71% of leased space (174,000 sqft) signed in H1 2019. Some operators opted to surrender space in H2 2019, CBRE added.

The high cost of CBD space and rising availability of new supply in non-core submarkets stimulated additional decentralisation activity in 2019. Occupiers relocated a total of 731,000 sqft of space away from core submarkets, the second highest annual figure since 2015.

Weaker leasing demand resulted in higher space availability. Vacancy climbed in Greater Central, rising from 1.3% at end-2018 to 3.4% at end-2019, marking the highest year-end figure since 2014.

Rents in this submarket fell by 5.9% YoY, the sharpest annual decline since 2012. Wan Chai/Causeway Bay and Greater Tsim Sha Tsui saw rents fall by 3.3% and 0.3% YoY, respectively.

The decentralisation trend kept vacancy low in Hong Kong East and helped rents increase by 6.3% YoY in 2019. New supply in Kowloon East resulted in vacancy remaining high at 15.1%, leading to a rental decline of 0.8% YoY in 2019.