Hong Kong office vacancy rate up 0.4ppt to 11.12% in Q2

Net absorption was at -176,300sq ft as weak demand persists.

Due to weak office leasing demand in Hong Kong, net absorption was at -176,300 sq ft in Q2. Colliers says this marked the slowest quarter since 2021 and pushed the overall vacancy rate up 0.4 ppt to 11.2%.  

As business sentiment and the labour market take time to recover from the fifth wave, Colliers does not foresee a strong rebound in leasing momentum in H2 unless the border is relaxed to introduce new demand. It projects 3.9 million sq ft of new Grade A supply could potentially come online in the second half of the year, which may raise the year-end vacancy rate and exert pressure on the rental outlook.

“Given the higher availability of new office space, which means occupiers should have more bargaining power as well as increased options, we expect flight-to-quality will remain the key theme for the office market for the rest of the year. At the same time, we expect the overall Grade A office rent to decrease by 2% in 2022, while the rental gap between CBD and non-core districts will further narrow as rents in Kowloon slightly pick up,” said Fiona Ngan, Head of Office Services at Colliers Hong Kong.

Here’s more from Colliers: 

Office leasing momentum started to pick up in late April as the city’s social distancing rules relaxed. In Q2, despite an uptick in leasing enquiries and inspection activities, demand from net lettings remained relatively weak, resulting in a net absorption figure of –176,300 square feet (-16,400 square metres), bringing the H1 net take up to -59,300 square feet (-5,500 square metres). This marks the slowest quarter since Q2 2021. Overall vacancy rose from last quarter’s 10.8% to 11.2%.

In Q2 2022, occupiers stayed cautious as the economy and business sentiment experienced disruption from the wave of Covid cases earlier in the year. As a result, cost-optimization remained a priority for most occupiers. Overall Grade A office rents were stable, only edging down 0.1% QOQ, bringing the YTD drop to 1.5%. Among all key submarkets, Island East witnessed the most noticeable drop, falling 1.7% QOQ, as the area’s vacancy rose from 9.3% to 10.0%. Meanwhile, rents rose by 0.8% QOQ in Kowloon East and 1.1% QOQ in Tsim Sha Tsui, as the areas benefited from decentralisation.

While flight-to-quality remained a key theme for occupiers, pre-leasing of new office supply was relatively active in Q2 2022. At least 300,000 square feet (27,500 square metres) of GFA was pre-committed. For instance, the Mandatory Provident Fund Scheme Authority pre-leased five floors in 98 How Ming Street, a new Grade A building in Kowloon East scheduled for completion in H2 2022. The company is scheduled to relocate part of its existing offices from Kwai Chung.