Office rental falls for seventh consecutive quarter

The rate of rental decline slowed to 3.5% in the first quarter of the year.

Office rental rates are continuing to decline, but the pace of those price falls moderated over the first quarter of 2021. Rates were down 3.5% in the first quarter of 2021, as co-working spaces close and businesses downsized.

This is a smaller decline than the 5.1% drop recorded in the previous quarter, but Savills plc noted in its Q1 office leasing report that this represents the seventh consecutive quarter of falls.

Rents on Hong Kong Island, in particular, fell by 4% during the quarter as rents in Central, Wanchai/Causeway Bay and Island East declined by 3.8%, 4.3% and 3.5%, respectively.

Wanchai/Causeway Bay suffered the largest rental fall due to its exposure to co-working operators and financial services firms. Meanwhile, Kowloon rents were relatively stable after slipping 2.8%. Savills noted rents in the district had been relatively resilient since in the third quarter of 2019, considering corporate downsizing was less common in the area.

The co-working industry, according to Savills, is still in a consolidation phase as businesses surrender office spaces due to work-from home policies and downsizing. 

“Given rents have fallen substantially from their peak, corporates are more willing to take up space in high-quality buildings in prestigious locations,” William Yiu, Deputy Senior Director, Kowloon Office Leasing, said.

“Thus, we believe that Grade AAA and Grade AA offices in core business districts will be fully occupied before Grade A offices in decentralized markets when the market regains its momentum.”

Moreover, the overall vacancy rate hit 8.9% during the quarter, up from 8.3% in the last quarter of 2020. Hong Kong Island vacancy rate rose to 7.4% from 6.8%, largely due to the vacancy increase in Wanchai/Causeway Bay to 9.5% from 8.4%. Centrals’ vacancy rate climbed to 7.6% from 7.3%, recording a 15-year high; whilst Kowloon’s rate also moved up to 10.8%.

Despite weak office take up, the Savills does not expect vacancy to rise in 2021 due to supply constraint. There are so far only two projects expected to be completed, which will add 697,596 sq. ft. of gross floor area during the year.

On a more positive note, Savills sees the strong IPO pipeline to drive up demand for floor space. It was reported that IPO funds have already surged 822% year-on-year in the first quarter aside from a total of 170 IPOs expected in 2021.