Lower rents than 2018, improved amenities and an abundance of available premises - everything a tenant wants to hear, right? The legacy of COVID-19 will be long lasting but the short-term impact on the office leasing market is offering new opportunities as Hong Kong’s changing rental landscape enables occupiers to leverage their strategy to better meet the needs of their business.
The pandemic has tested workplace resilience and alerted corporate occupiers to develop continuity plans by raising the question, ‘what will the workplace look like when business resumes?’. Hong Kong is one of the first cities that has managed to minimise the outbreak with its workforce resuming relatively close to business as usual, already. But global reverberations are potentially showing signs of a reduced need for traditional office space, which is creating a correction in rental rates and occupancy levels.
In our latest piece of research, ‘After COVID-19: New Trends of the Hong Kong Office Market’, we discussed the drivers we are seeing in the office leasing sector which range from employee safety, cost saving initiatives and a flight-to-quality trend (workplace upgrades), to the falling rental gap between the traditional CBD of Central and Admiralty, and non-core areas. From this, we consolidated to three core trends: ‘embrace of technology’, ‘workplace flexibility’, and ‘recentralisation opportunities’. Focusing on the later trend, we take a closer look at how some companies may buck the decentralisation trend and opt to move to the CBD.
Decentralisation vs. Recentralisation
Across Asia, decentralisation has been occurring for years as corporate occupiers, expand, split and look for alternative locations. In Hong Kong, this is also the case with several well-established and emerging areas that offer cost efficient options to the traditional CBD location. Interestingly, Hong Kong’s rental gap between the CBD and outer districts has narrowed since 2019, mainly due to slower leasing momentum in core areas.
The weakened economy that is being compounded by COVID-19 is having a negative trickle effect on the leasing market with CBD rents anticipated to fall by 18% in 2020, after a 6% drop in 2019. With the office market entering a consolidation phase, CBD rents are declining at a faster pace than non-core areas, narrowing the rental gap to HK$63 (US$8.2) between CBD and Island East (as of May 2020), and we expect the rental gap to further narrow to HK$53 (US$6.8) by 2022. For financially well-established occupiers, or organisations that see the locational impact CBD offers, there is an opportunity to secure attractive terms over the next two years as new supply completes.
The target demographic that could benefit the most from a CBD move will be Asia Corporates and particularly PRC financial firms, ListCo’s, wealth management, hedge funds and private banking. There may also be an opportunity for companies with a long-term vision in Hong Kong to prelease space at early bird rates. Initiatives like the Greater Bay Area (GBA) and the exciting prospect of Site 3, provide strategic opportunities for occupiers to secure leases with more attractive terms while the market experiences a correction.COVID-19 has been felt globally and triggered the world’s largest work-from-home exercise. The surprise (or not for some) is remote working has proved to be successful in the majority of cases, and is now shaping office demand, workplace strategy and future use of real estate. The trajectory of each business is different requiring occupiers to discover their desired real estate solution, meaning the question isn’t ‘the’, but ‘what will your workplace look like when business resumes?’. If doing nothing is the right solution, that’s fine. If following an existing strategy is still the aligned, then that’s also good. But if the recentralisation model resonates and now feels like the right time to act, utilise the current tenant centric market and narrowing rental gap. As we all know, the next 18 months are going to be critical, so lay the foundations for post-pandemic success by securing the right office space, in the right location.