Smaller Hong Kong office landlords now cutting rents even more aggressively

Meanwhile, prime building landlords are tightening up their leasing strategy.

In February, overall Grade A office rents on Hong Kong Island adjusted to HK$77.5 per sq ft, falling 14.8% on a YoY basis. According to Knight Frank, some landlords in Central reviewed their portfolios and adjusted their leasing strategy after Chinese New Year. 

Smaller landlords under greater vacancy pressure have cut rents more aggressively, offering generous incentives to attract good covenant tenants. However, some landlords of prime buildings that have successfully leased vacant space as a result of rental adjustments and concessions have begun tightening up their leasing strategy. 

Here’s more from Knight Frank:

As flexible working arrangements have become prevalent in the wake of the COVID-19 pandemic, more tenants are taking the opportunity to explore viable alternatives to renting traditional office space. As a result, there is increasing demand for co-working space from small to medium-sized companies, especially those with 50 to 100 staff. Some companies are reportedly considering relocating their entire operations to coworking space. 

Looking ahead, as cost-optimisation and high flexibility are set to become major concerns of businesses in the postpandemic era, demand for co-working space will undoubtedly continue to grow.

Kowloon 

Tenants in Kowloon continued to be cautious and adopt the wait-and-see approach after Chinese New Year, leading to a low level of leasing activity in February. As cost savings are crucial for business amid the economic uncertainty, tenants have tended to renew their leases to avoid the fit-out costs in new premises. About 60% of leasing transactions during the month were renewals. Relocation cases were driven mainly by downsizing. For instance, Sony Corporation moved from a 27,000-sq ft office in Exchange Tower to a 16,800-sq ft space in C-Bons International Center. 

In the 2021-22 Hong Kong Budget, the Financial Secretary proposed converting five parcels of commercial land in Kai Tak to residential use, which would incur a total loss of 4.5 million sq ft of future office space. As several sizeable new developments will be completed in late 2022, we expect the conversion to help relieve the burden of potential excessive office supply in Kowloon East and provide a better balance between the office and residential markets. 

Given the introduction of the vaccination campaign in Hong Kong and across the globe, an upturn is expected in economic sentiment and business confidence. We expect leasing activity to be more robust in the coming quarters, as more multinational corporations that deferred corporate real estate plans owing to the COVID-19 pandemic will reactivate their plans in the near term.