The Hong Kong office investment market is navigating a significant period of adjustment. As of Q3 2025, the overall office capital values have dropped by about half from their peak. While transaction volumes remain subdued amid ongoing price discovery, recent fundamental indicators, particularly in the leasing market, suggest a foundation for stability is forming. This warrants a closer look at the path ahead.

Figure 1: Office transaction volume trend

The current market environment reflects through the interlocking relationship between Commercial Real Estate (CRE) assets, financial institutions, and the capital market, as illustrated in the diagram below.

This challenging feedback loop begins with CRE assets. Factors like increased vacancies and rental adjustments have compressed operating incomes and in turn, reduced valuations. This deterioration in asset quality naturally prompts banks to adopt a cautious stance on loan exposure.

As a result, new credit for real estate transactions has tightened. This restriction on available capital makes it difficult to complete deals, which in turn limits the price discovery process. This slowdown eventually affects the market's ability to find a new equilibrium. The key question remains: what catalyst will break this cycle? A sustained improvement in property fundamentals can drive rental growth and stabilise valuations. This is the most likely factor to restore lender confidence and unlock capital flow.

Figure 2:  The feedback loop in the Hong Kong CRE market

^{Source: JLL}

Despite a standstill in the investment market, the leasing market has shown notablele strength. Net absorption saw a big uptick in Q3 2025, as tenants capitalised on favourable terms to upgrade to higher-quality premises. While this "flight-to-quality" is a positive sign, its long-term sustainability will depend on genuine business expansion rather than just tenant relocations alone. This trend is creating a distinctly two-speed market. Rents in prime assets across core locations such as Central are stabilising as demand concentrates at the top end. However, this masks a deeper challenge for older, lower-specification buildings. which face the risk of structural obsolescence as they struggle to compete.

For now, the investment landscape continues to be led by end-users making strategic acquisitions. Institutional investors remain largely on the sidelines, waiting for rental yields to offer a more attractive premium over lower-risk assets.

Looking forward, several factors support a cautiously optimistic outlook. The peak of the new supply cycle is expected to pass, with a significant tapering of new office completions from 2026 onwards. This will provide the market a crucial period to absorb the existing vacancies. Furthermore, while the inflow of mainland capital has been supportive, its impact remained highly selective. It has focused on trophy assets rather than providing a universal lift to the market.

The path to recovery also depends on a stable macroeconomic environment. While global interest rates and geopolitical tensions appear more settled, the market's nascent recovery remains sensitive to external shocks.

In conclusion, the Hong Kong’s office market appears to be making ground for prime buildings, supported by strong leasing fundamentals. However, the journey towards a broad-based recovery in capital values will be gradual. A true revival will hinge on several factors, including the unfreezing of the credit market, the transition of leasing momentum into sustainable demand, and a stable global economic environment.