Amid an economic downturn, there has been an increase in businesses – from co-working space providers to finance companies and retailers – surrendering their spaces before contracts expire; however, our experts have not seen a further rise in vacancy due to slowed leasing momentum. Instead, they have seen new opportunities emerge; for example, in the office leasing market, there are relocation opportunities for tenants. In the retail leasing sector, owners and service providers (such as elderly homes) have taken advantage of this high-vacancy period to conclude large-size leasing transactions. Read the latest Weekly Snippet to find out more from two of our leading experts, Wang Cheung of Office Services and Cynthia Ng of Retail Services.
Surrender space stimulates relocation opportunities
Unlike 2018 and 2019, which saw new office supply reach a decade high, there has been limited new office supply in Hong Kong throughout 2020 and expected in the remainder of 2021. The total new office supply was forecasted to be 450,000 sq. ft. net and 530,000 sq. ft. net respectively. Yet, the availability of abundant high-quality second-hand stock at reduced rent has increased and injected energy to the office leasing market.
This second-hand stock is located across Grade A office buildings on both Hong Kong Island and Kowloon. Apart from location advantage, many of them come with existing fittings of previous tenants. With tightened control in capital expenditure, these fitted options are ideal relocation opportunities for small- to medium-sized occupiers who are look for cost-effective solutions. With an average drop in rent of 15.9% in 2020, we have seen more transactions between 2,000 sq. ft. and 8,000 sq. ft. in buildings such as Grand Century Place, Mira Place Tower A and The Gateway since Q4 2020.
We foresee that the surrender space by Standard Chartered Bank in Standard Chartered Bank Building as well as in Millennium City 1, VF’s space in International Trade Tower, the potential surrender of space by Manulife in Manulife Financial Centre and so on will help attract more relocation activities.
Successful conclusion of large-size retail leasing transactions
Whilst we see more vacancies and surrenders taking place in the current retail market, there are also large size transactions with elderly home operators in neighbourhoods or less core retail locations of Hong Kong. The 1/F and 2/F of Jupiter Terrace in Tin Hau have been newly leased at HK$500K per month for 14,900 sq. ft., at approximately HK$34 per sq. ft. A second transaction with another elderly home operator, Fuk On Home of Aged, has also renewed the lease of its premises on G/F to 2/F of Po Wing Building in Sham Shui Po at approximately HK$700K per month for 22,448 sq. ft. The rent is around 20% higher than its previous lease at HK$600K.
We will continue to see landlords and service providers, such as aged care centres to negotiate and renew successfully, whilst there isn't any new demand for large-size premises in relatively old buildings during the current Hong Kong retail market cycle.