CBRE: Hong Kong office leasing activity is expected to pick up over the next 3 years

The Zhitong Finance App learned that CBRE published a research report to comprehensively review and analyze Hong Kong's office market trends from 2022 to 2025, and forecast trends until 2028. As the economic environment improves, demand for Hong Kong offices is expected to gradually pick up over the next few years. Rental activity is expected to increase over the next three years compared to the period 2022 to 2025. Growth will be mainly driven by the following factors: continued recovery and steady growth in the traditional service sector; an increase in the number of mainland Chinese companies setting up businesses in Hong Kong; and emerging demand from the new economy.

Key trends from April 2022 to March 2025:

Despite the company's emphasis on cost savings, some industries have expanded office space, increasing the total leased area by 1.1 million square feet;

The growth is partly driven by non-traditional tenant industries, which are generally less active in the Grade A office market. Many major industries are still in a state of contraction;

Despite an increase in leasing rates, a significant increase in supply has nearly tripled the vacancy rate in Hong Kong compared to before the pandemic. The current vacancy rate of over 17% is a record high;

During the study period, the market saw the supply of new Grade A office buildings, reaching 7 million square feet, 2.3 times the area added during the previous study period (April 2019 to March 2022);

This high level of new supply, calculated on a three-year rolling basis, has not appeared in Hong Kong office buildings for 15 years;

The leasing rate of the new supply of office buildings has been slow. 55% of the new supply during the study period had not been leased out, contributing 3.9 million square feet of vacant space in Hong Kong;

Even as the supply of office buildings increased, the number of new leases increased only slightly by 3% compared to the previous study period, averaging 987,000 square feet per quarter;

The figure is 22% lower than the figure recorded in the same study conducted by CBRE Weiss during the peak of the office market from April 2016 to March 2019;

Increased pressure on vacancies has led to a long-term decline in rents. Rents continued to fall 17% during this study period, a slower rate of decline compared to the 27% drop observed in the previous study period from April 2019 to March 2022.

CBRE has identified several new trends in the Hong Kong Grade A office market over the past three years:

Total leased area growth resumed, adding 1.1 million square feet;

Emerging industries dominated by the public sector and the education sector, as well as emerging non-traditional banking and finance companies, are growing rapidly;

Fewer new tenants are leasing office buildings;

The corporate office footprint has changed, with local companies expanding their business while multinational companies are shrinking;

The pace of decentralization has slowed down, and the space involved has declined for two consecutive research periods;

More green office buildings, owners are actively transforming them to meet environmental standards;

Owners' demand for personal use has increased, and the proportion of users in the leased space has increased;

During the peak supply of office buildings, the rate of absorption of new office buildings slowed down;

The coworking space industry is shrinking in size.

Chen Jinping, executive director and head of CBRE's Hong Kong Research Division, said that the Hong Kong Grade A office market is entering a new stage of restructuring. Educational institutions and non-traditional banking finance companies have expanded leases by more than 430,000 square feet, as well as a recovery in retail-related and insurance company demand, marking a dynamic shift in tenant demand. Despite a significant rise in new supply, driving up the vacancy rate, due to the accelerated growth of the Hong Kong service sector and a marked recovery in tenant demand, it will continue to drive the office rental market.

2026-2028 outlook

CBRE is confident about Hong Kong's economic prospects.

Hong Kong's recent improvements in several global rankings have strengthened the market's confidence in the economy, strengthened the city's fundamentals, and expanded its ability to attract global enterprises, capital and talents in various fields. Economic momentum will be mainly driven by government initiatives to promote emerging industries and complement the steady growth of the city's traditional pillar industries.

As the economic environment improves, demand for Hong Kong offices is expected to gradually pick up over the next few years. Rental activity is expected to increase over the next three years compared to the period 2022 to 2025. Growth will be driven mainly by the following factors:

The traditional service industry continues to recover and grow steadily;

the increase in the number of mainland Chinese enterprises setting up business in Hong Kong;

Emerging needs in the new economy and industry;

Tenants upgrade to office space in a new strategic development area.

CBRE expects the following trends in the Hong Kong Grade A office market in the next three years:

Rethink workplace strategies to match the new normal;

Each region has a different pattern, and competition will focus on multiple non-core markets in Kowloon;

As inventory growth begins to slow in the next three years, the market enters a space digestion period;

As commercial building modifications and end user purchase demand rises, the demand for forced relocation and upgrades increases;

Central leasing rates continue to recover and will be dominated by financial companies;

Tsim Sha Tsui West will become an emerging alternative hub for financial companies;

The trend of de-centralization and relocation is slowing down due to a decrease in new supply in non-core areas;

Landlords will continue to maintain a flexible strategy, and green leases will become increasingly popular.

The future 2025-2028: A new chapter in Hong Kong's Grade A office landscape

Fung Wai-sheh, executive director and head of CBRE Hong Kong's leasing transactions and consulting department, said that with the gradual recovery of Hong Kong's economy, the Grade A office market is being reshaped and is entering a phase of space digestion. Leasing activity is expected to pick up over the next three years, driven by a steady rebound in traditional services, the expansion of mainland Chinese companies, and demand from emerging industries. Although the overall vacancy rate remains high, each region will have mixed rental performance depending on its supply and demand dynamics. It is expected that Tsim Sha Tsui West will go hand in hand with traditional traditional commercial districts and become a strategically attractive emerging area.

Ms Fung added that tenants are paying more and more attention to flexibility and a work environment where the health of the whole person is the main focus. In order to cope with continued high vacancy rates and changing tenant needs, landlords are adopting more flexible leasing strategies. These include fully furnished shared facilities such as office buildings, cafes, and health spaces, as well as green leasing measures that meet corporate ESG goals. These are particularly appealing to small tenants and startups looking for cost-effective, ready-to-use solutions. Owners who can provide relevant measures to meet these changing market needs will be most capable of succeeding in the next phase of market development.