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The aftershocks of 2019’s sociopolitical unrest combined with the onset of the COVID-19 pandemic created strong headwinds for Grade A office leasing demand in 2020. Full-year net absorption registered -2.2 million sq. ft., the lowest on record. Overall vacancy climbed sharply to 9.9%, a similar level to mid-2009, with the underlying 8.1 million sq. ft. of vacant space the highest since late-1999.

Occupancy in Greater Central came under the strongest pressure, with vacancy in Central, Admiralty and Sheung Wan combined more than doubling over the year to 1.6 million sq. ft. (7.3%), the highest since Q3 2004. The submarket saw negative net absorption of -840,100 sq. ft., the weakest of any submarket.

Negative demand was a direct result of corporate cost-saving. While many occupiers opted to stay in their current building, downsizing was also common across the major office occupying industries. New and expansionary demand was limited, with gross leasing volume falling to just a third of 2018/2019 levels. Decentralisation also slowed as the rental gap between core and non-core submarkets narrowed. High reinstatement costs and tight CapEx further discouraged occupiers from moving.

Once a major demand driver, coworking centres’ footprint growth registered its first decline since 2016. While some closures were planned before the pandemic, new lettings by coworking centres shrank by 39% y-o-y in 2020. However, the tail-end of the year saw selected leading operators expand by leasing fully-fitted premises surrendered by competitors.

Travel restrictions led to a noticeable pullback in new leasing demand from mainland Chinese firms, which fell by 74% y-o-y and 62% y-o-y from 2018 and 2019, respectively. The year nevertheless saw some expansion by mainland Chinese financial firms with an existing presence in the city.

Landlords turned more flexible over the course of the year as vacancy pressure escalated. Overall net effective rents fell by -17.4% in 2020, bringing the total decline from the 2019 peak to -21.0%. Elevated vacancy meant Central and Tsim Sha Tsui experienced the sharpest declines, falling by 19.9% y-o-y and 17.6% y-o-y, respectively, over the year. Hong Kong East was the best performing submarket, with rents declining by a relatively mild 8.3%, thanks to low vacancy.

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Sustained demand for financial and professional services, driven by Hong Kong’s strong IPO market, will underpin growth momentum for the city’s office market in 2021, provided the local pandemic is eradicated. Assuming cross-border travel restrictions are removed in H1 2021, new set-ups by mainland Chinese companies and pent-up demand from the financial sector will help fill some of existing vacancy.

While net absorption is expected to return to positive territory along with the economic recovery, 8.1 million sq. ft. of immediately available space coupled with upcoming lease expiries will result in prolonged elevated vacancy. The market will therefore continue to favour tenants in 2021.

Aside from industries benefitting from the strong IPO pipeline, corporates in other sectors will remain cost cautious. Expansionary demand, particularly that from multinationals, will be limited. Low CapEx options will be sought after.

Occupiers will closely monitor space utilisation as the local pandemic is gradually contained. This data will help decision makers formulate long-term office strategies ahead of the supply boom in 2022/2023. In the coworking segment, established operators are set to continue to grow their market share but newer and smaller players will remain in wait-and-see mode due to the high availability of ordinary space for lease.

The narrowing rental gap between core and non-core submarkets will curtail decentralisation activity in 2021. However, new decentralised projects scheduled to come on stream in 2022/2023 are expected to attract major occupiers with upcoming lease expiries. Pre-leasing activity in new supply will gradually gather momentum as the economy recovers.

Only two small-scale office buildings in decentralised locations are due for completion in 2021, providing a total of 341,000 sq. ft.. Despite the lack of new supply, rents will continue to trend down, at least for the duration of H1 2021. The second half of the year could see an improvement in demand, provided the global pandemic is brought under control and the economy begins to recover. CBRE forecasts Hong Kong Grade A office rents to decline by another 5%-10% across most of the major submarkets in 2021.

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Figure 8

Hong Kong SAR Real Estate Market Outlook 2021

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Henry Chin
金緯 博士
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