Hong Kong's office market is recovering slowly, offering tenants chances to secure high-quality spaces at competitive rates, driving a flight-to-quality trend.
Insight
Flight-to-quality: Price is not the only determinant of Hong Kong’s office locations
Hong Kong's prime office locations have in the first half of 2024 experienced a cooling shift. The overall vacancy rate climbed to 13.6% at the end of June 2024, a stark difference from the historically tight market conditions. As seen in our Asia Pacific Office Q1 2024 report, this upward trajectory is particularly pronounced in Grade A offices, where market sentiment remains subdued.
This however has created an opportunity for tenants to uncover unrealised value in their leasing dispositions, and many are predictably not letting it slip by. This is the very basis of a flight-to-quality trend that we are currently observing in Hong Kong’s office leasing market.
This is evidenced by how there was an increase from 4Q23 owing to new letting and expansion cases. As of early 2Q24, three new completed projects added 709,000 sq ft (NFA) of space to the market – The Henderson in Central, Six Pacific Place in Wan Chai, and Viva Place in Wong Chuk Hang. Partly driven by this rise in supply, Hong Kong’s office vacancy is at 13%. Kowloon East had the most vacancies at 17.7%, and Tsim Sha Tsui the least at 9.4%. Overall, Hong Kong’s office leasing growth was -0.4% month over month.
Anticipating a continued influx of new supply, most office landlords are likely to keep their rents flexible due to demand still in the early stage of recovery and high vacancy levels. Beyond that, rents are expected to face downward pressure due to limited expansion demand. Overall, Grade A office rents are projected to fall by 5% to 10% by end-2024.
As noted earlier, this softening of the office leasing market has enabled tenants to seek high-quality spaces without going over budget, leveraging increased high vacancy level to negotiate better terms and control over their office. Many are also taking the opportunity to re-align their office space and seek out other prime locations which yields more quality for their current outlay.
What this means, specifically, is that tenants can either seek out a move to a better location within a similar budget; or, move to a building with more comprehensive property management; or, to consolidate satellite locations into a single larger site and leverage the benefits of centralisation and proximity.
This flight-to-quality trend is driving a slight increase in office leasing activity through the remainder of this year. We are witnessing physical office spaces making a return, and companies are planning for their long-term workplace needs, which provides a stronger foundation for lease negotiations that encompasses a broader spectrum of considerations.
It's crucial to remember that while the overall market sentiment towards Grade A offices remains subdued, data-driven strategies can yield significant rewards. By carefully analysing market trends, occupancy rates, and rental fluctuations, businesses can identify hidden gems and secure office spaces that align with their long-term goals.
Hong Kong is unique in that value propositions aren’t district-dependent; rather, it comes down to specific blocks, or even some iconic Grade-A office buildings which dictate the best value for long-term occupiers. It isn’t as simple as merely being in the city. Businesses that lean on the best data-led information will be able to see the long-term benefits of its workplace strategy and location.
JLL tracks over 4bn sqft of leasing data, and our MapIT platform breaks down the details you need to make informed decisions in a hyperlocal environment. Which Hong Kong locales fit your specific office leasing needs? MapIT is a location intelligence platform that enables users to gain access to global market data as well as geographical information system (GIS) analytic insights.
When such data intelligence is coupled with incisive analysis from our expert brokers, JLL is uniquely poised to seek out the best value for your office leasing needs. We apply our time-tested expertise to unlock greater value in your workplace and make informed decisions to achieve long-term success.