Office Rents Look To Fall Further In An Uncertain Year Ahead

• The fourth quarter saw further rental declines across all districts ranging from -1.5% to -3.5%, bringing the full year decline to 7.6% for 2022
• Vacancy rates also increased to 10.4% from 9.9% a year ago, with vacant space standing at 6.6 million square feet net at the end of 2022
• Of the 3.8 million square feet net of Grade A office completions in 2022, only 19% has been pre-committed so far, adding 3.1 million square feet of vacancy space to the market in 2023, on top of scheduled completions
• Most significant deals completed over the quarter were multi-floor pre-lettings of newly completed/to be completed Grade A offices in both the CBD and decentralised areas
• Office rents are expected to continue to decline by 10% in 2023 under the mixed impact of hangover vacancy and positive developments.

Rents down by 7.6% over the course of 2022

Grade A office rents slipped by another 2.3% in Q4/2022, with more moderate declines recorded in Kowloon East and Kowloon West (-1.5% and -1.6% respectively) whereas areas on Hong Kong Island such as Wanchai/Causeway Bay (-3.5%) and Island East (-3.3%) registered greater falls. Rents tumbled by 7.6% over the full year of 2022, with Grade A office rents now 31.4% below their previous 2019-peak.

Overall vacancy rose to 10.4% in final quarter

Vacancy rates also increased to 10.4% from 9.9% a year ago, with vacant space standing at 6.6 million square feet net at the end of 2022. Of the 3.8 million square feet net of Grade A office completions in 2022, only 19% has so far been pre-committed, adding 3.1 million square feet net of vacant space to the market in 2023, on top of the 1.9 million square feet of scheduled completions. The total volume of vacant space may amount to 9.78 million square feet at the end of 2023, representing a vacancy rate of 14.9%, if we assume take-up to rebound to 1.3 million square feet for the year, the annual average from 2011 to 2019.

XRL development leasing deal stood out

Most significant deals done over the quarter were multi-floor pre-lettings of newly completed or to be completed Grade A offices in both the CBD and decentralized areas. The highest profile was the UBS pre-commitment to 250,000 square feet (nine floors) of SHKP’s XRL Topside development in Kowloon West, to which the Swiss bank will be relocating their IFC offices from 2026 onwards. Other new offices in decentralized areas continued to be favoured by MNCs as cost saving relocation options.

Rental drop to continue in 2023

Looking ahead, amid the mixed picture of post-COVID normalization and concerns over the high vacancies and local and Mainland economic performance, Grade A office rents are expected to continue to decline by 10% in 2023, with areas expecting more upcoming supply (and overhang vacancy) likely to see deeper rental discounts even as take-up improves.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "The rebounding stock market, a loosening of most COVID-related measures as well as the scheduled border reopening with the Mainland are all positive spins for office demand, but uncertainties linger given hangover vacancy from 2022 completions, and concerns over the speed of recovery."

Mr. Ricky Lau, Deputy Managing Director, Head of Office Leasing of Savills said: "Couped with the proposed Mainland border reopening in early 2023, some wealth management firms and insurance companies are already framing expansion plans to cater for the anticipated influx of Mainland capital."

Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing of Savills said: "Some new office supply, originally scheduled for 2023, will see completion pushed back by six to nine months as COVID has hit both the supply chains for materials and construction schedules, partially alleviating the space overhang from 2022."