OFFICE RENTAL HONG KONG

Sep 2024

Hybrid Working Space Impact, Office utilisation rates have stabilised.

• Over 60% of occupiers stated that their office attendance had reached a steady state, up from 50% in 2023, indicating that firms have embraced flexible and/or hybrid working as a stable model. Some 32% of companies anticipate an increase in office usage over time, on par with the 34% who said the same in 2023.

• By sector, financial companies have largely achieved a steady state of office attendance, with 71% of respondents indicating that this was the case, and only 25% expecting an uptick in usage. This trend is expected to stabilise in the coming year, contingent on a global economic recovery. Half of TMT sector respondents reported that their office attendance had stabilised, while the other half anticipate increased usage. While larger tech firms have optimised office utilisation, smaller startups are focused on expanding headcount, which sometimes leads to constraints on office space as they look to accommodate growth.

Actual attendance is aligned with company expectations

• Employer expectations for office attendance and employee behaviour are closely aligned. Employees in the region are showing slightly higher office attendance than what companies are requesting, suggesting a strong commitment to being present in the workplace and indicating a complete return to the office.

• Some 70% of companies want their employees to attend the office at least three days a week, with 36% aiming to have their employees attend the office for a full five-day work week. Companies in mainland China have the highest expectations, with 69% expecting staff to be in the office five days per week.

Resetting thinking about office utilisation

• Corporates need to rethink how we measure and interpret office utilisation to increase the precision of estimating current and future space needs: Leading clients are using three utilisation metrics: peak, average, and trough.

Key utilisation questions to consider:

• If utilisation targets are set too high will that be a reason why people won’t come into the office?

• At what level of utilisation is an office full?
  (data suggests around 85% for unassigned workplaces – if ambition is for people to sit where they want, with who they want)

• Consistent utilisation is the key – minimising the gap between peak and trough utilisation maintains workspace vibrancy – which in turn attracts people to the office.

• Is asymmetric space use a benefit rather than a problem? The workforce may prefer to have quiet days for focus and quiet chats and busy days to connect with people they don’t see so often.

Region outperforms but still opportunities to optimise workplace

• The proportion of companies in Asia Pacific (43%) reporting a peak utilisation rate of 80% and above was higher than their counterparts in Europe (26%) and the U.S. (30%). Within the region, lower rates of utilisation were observed among TMT and professional services firms, which continue to adopt flexible working.

• Most organisations target 80%-90% office utilisation, balancing vibrancy and optimisation while avoiding overcrowding in workplaces to a level that detriments user experience and office attendance. For those that cannot attain 80% utilisation during peak hours, there are opportunities for further optimisation. Occupiers must weigh up whether to recoup opportunity as a saving or reinvest in the space for more connection and collaboration as well as space for small meetings and focused work.

• Before the pandemic, the difference between peak and average attendance during a typical day or week was within 10%. This gap has widened and created challenges around maintaining vibrancy on quiet days and the ability to recover and optimise space.

CBRE

Oct 2024

Key Highlights

Office

• Tenants continue to prioritise cost-controlling which limits demand for additional space. Rents will continue to decline in the next six to nine months.

Retail

• Brands target prime locations, resulting in market polarisation in core districts.

Industrial

• Weak demand continues to exert pressure on warehouse rental levels.

Investment

• Distressed sales continue to drive up transaction volumes while overall investment volume is forecasted to rebound.

Colliers

May 2024

Lai Sun Development had agreed to sell 10% equity interest of AIA Central for a consideration of HKD 1.42 billion to AIA Group Limited. Upon transaction completion, the buyer will hold 100% interest of the building.

Residential: Monthly residential transaction volume hit the highest level since 2012 in April. Hong Kong Serviced Apartments is having a high volume of enquiries in the major business districts.

Retail: Total retail sales in March declined by 7.0% y-o-y, the first negative growth recorded since border reopening last year.

Industrial: Tesla reportedly expanded its maintenance and service centre in Tuen Mun with an addition GFA of 27,824 sq ft.

JLL

Q1 2024

HONG KONG ISLAND

Given soft market sentiment and limited demand, the overall average rent on Hong Kong Island fell further to HK$64.7 per sq ft in December, marking a 1.4% MoM drop or 6.9% YoY drop. In full-year 2023, Central experienced the largest decline among major submarkets, with the overall average rent decreasing by 10.2%. Despite the rental downtrend, the flight-to-quality trend continued. Companies from multiple sectors took advantage of the tenant-favoured environment to consolidate their office space. Certain expansion cases were recorded over the month. A US investment fund house, Franklin Templeton, took up a whole floor of Two International Finance Centre for office expansion. Futu Securities expanded its office space in the United Centre to approximately 20,000 sq ft. Simultaneously, there were an increasing level of enquiries and demand from Chinese mainland companies. We have noticed some newly set-up Chinese companies actively seeking small to medium-sized office space of 2,000 to 3,000 sq ft.

As office landlords are beset with record-high vacancies and unfavourable supply–demand dynamics, more of them have started slashing their asking rents or offering flexible leasing packages to attract tenants. Going forward, Knight Frank expects the office vacancy rate to remain high and overall rents on Hong Kong Island fall by 0–3% in 2024.

KOWLOON

Office demand continued to be soft due to the festive season. The average monthly rent was about HK$22 per sq ft, and the deals were dominated by offices with an average size of 3,000 sq ft or below. Activity remained lively in Kowloon East, with engineering companies the key demand drivers in December, while there is also a growing no. of corporates looking for serviced apartments in Central.

Despite the quiet market, there was growing demand from government and infrastructure businesses, supporting leasing market activity during the month. The Immigration Department leased a 24,000-sq-ft office space in Manulife Financial Centre; and a machinery company rented about 20,000 sq ft in Ever Gain Plaza in Kwai Chung. Echoing activity on Hong Kong Island, the flight-to- quality trend was prevalent. Haleon, a consumer healthcare company, moved its office from The Gateway to AIRSIDE, with an area of 9,000 sq ft.

Looking forward, we expect the Kowloon office-leasing market to gradually gain momentum in Q1 2024. With further improving market demand, a more solid positive effect should hopefully be seen in Q2, and mild rental growth of 1 to 3% is expected in the Kowloon market for full-year 2024.

Knight Frank

Q1 2024

• Positive economic growth has traditionally driven office demand.

• Demand translates into take-up except where space availability is constrained.

• Hybrid and work-from-home arrangements have weakened the relationship between economic growth and take-up.

• Employees are demanding greater amenity in and around the office.

• Investors and corporates are demanding ESG credentials from buildings.

• Two tier markets are likely to appear due to employee, corporate and investor demand.

• Outside China the majority of markets are seeing positive, if not healthy and sustainable growth.

• Where a mature market has limited supply, expect stable/ growing rents for ESG and prime offices.

• Tenant markets are expected in most major regional cities in 2024.

• Rental movements (positive or negative) in the cities we monitor will be modest this year.

Savills