Some 3 million square feet of supply will hit the market next year, likely delaying any recovery in office rentals, analysts say

Hong Kong’s office leasing market is in a troubling slump. Nearly a fifth of floor spaces across the city are vacant, unprecedented in the financial hub, and rents have fallen to levels last seen in 2015. Not even lower interest rates can turn this around over the next 12 months, experts say.

While businesses are not recovering fast enough to fill up the floors, the city’s landlords including Sun Hung Kai Properties, Mandarin Oriental Hotel/Hongkong Land, and SEA Holdings are partly to blame for the glut.

The trio and their peers are adding some 3 million square feet (278,709 square metres) of new office space to the market next year, a property consultancy estimated. That is expected to worsen the oversupply situation, currently at an all-time high of 17 per cent across the city.

“In light of the supply overhang, it will remain a tenants’ market in 2025,” an agent said. “The new supply will lead to higher vacancy by end-2025. Rents are expected to come down by roughly another 5 per cent in 2025.”

Sun Hung Kai will put 2.1 million sq ft of space into the market next year, when its International Gateway Centre in Tsim Sha Tsui is completed, according to another property consultancy. One Causeway Bay , a Mandarin Oriental and Hongkong Land project, will add 410,400 sq ft, while SEA Holdings will inject 310,700 sq ft from its Kowloon East development.

The first rate cut by the Federal Reserve and the Hong Kong Monetary Authority could give the market a little spark, according to a local property agency. Leasing and renewal deals have breathed a new lease of life into the downbeat market over the past four months, it noted.

“The interest-rate cut would be a supportive factor to the investing market, economic activities and the demand for offices,” an agent said. “Rental prices of the office segment would turn positive.”

Meanwhile, an index measuring overall office rents in Hong Kong fell last quarter to the lowest since early 2015, according to the Rating and Valuation Department.

In Tsim Sha Tsui, for example, prime office spaces fetched HK$474 (US$61) per square metre, the cheapest since the third quarter of 2012. In Central, average monthly rents fell to HK$946 per square metre, revisiting the levels in the first quarter of last year.

Rents for grade A and grade B offices have declined by 33 per cent and 17 per cent, respectively, from their peaks in 2018-19, according to the agency. The outlook is still mixed, as rents for prime office space have weakened by 7.3 per cent, while those for grade B offices gained 1.3 per cent, the agency said.

Deloitte renewed its 125,200-sq ft lease at One Pacific Place in Admiralty for up to HK$12.52 million a month, according to the agency. Chinese lender ICBC took up 200,000 sq ft at One Harbourfront in Hung Hom for HK$5 million a month.

In other notable movements, insurer AIA Group absorbed 150,000 sq ft at the AIRSIDE in Kai Tak for HK$4.5 million a month. A foreign law firm took up 22,800 sq ft at the Alexandra House in Central for HK$2.3 million, and US brokerage Wells Fargo extended its 24,000 sq ft lease at Three Pacific Place in Wan Chai for HK$2 million.

Do these deals foretell a sustained recovery? Much will depend on how the businesses will respond, and how fast lower financing costs work their way into the system. Hong Kong’s economy has thus far struggled to get out of second gear since the end of Covid-19 pandemic.

The number of regional headquarters and offices in the city has stagnated at 9,040 between 2019 and 2023, according to government data. The city has also lost its crown as the world’s busiest venue for new stock sales, with small offerings peppering the market until Midea Group’s jumbo deal arrived last week.

A moribund IPO market means a reluctance among companies to expand, impacting the demand for office spaces, according to another agency.

“An improved IPO pipeline will generally lead to better business prospects for financial and professional services firms,” the agent said. “Business sentiment would improve but cautious budgeting and innovative workplace strategies will prevent office demand from experiencing a sharp jump.”

Overall office rents in Hong Kong could retreat by 7 per cent to 9 per cent this year, the property consultancy forecasts. A deeper cut in interest rates, and a stronger rebound in mega IPOs, are needed to inject optimism into the office leasing and rental market.

The initial interest-rate reduction last week is still “not significant” to have a meaningful impact on office demand, another agent said. “Over the long run, and after a few more rate cuts, the impact would be more obvious.”