2022 Office Property Market Poses Challenges: Record Vacancy Levels and Slowing Leasing Activities

The leasing of office spaces in Hong Kong slowed in 2022 due to caution amidst COVID-19 policies, global interest rate hikes and renewed geopolitical tensions. While the new leasing volume was 64% higher than the levels in 2020, the total volume dropped by 11% YOY to 4.8 million sq. ft. The banking and finance sector was the most active, accounting for 27% of the total leasing volume for the year.

Pre-committed space in newly completed buildings helped to ensure a return to positive net absorption. Although net absorption contracted by 841,500 sq. ft. in 2021 and 2.2 million sq. ft. in 2020, the total occupied space expanded by 601,100 sq. ft. in 2022. However, if pre-commitments made earlier in the new supply are disregarded, net absorption for the year would have been negative, at 321,600 sq. ft.

New supply in terms of office space has reached new heights since 2008, with a total of 41 million sq. ft. However, commitment to said space was low, with only 20% absorbed so far. As a result, the city-wide Grade A office vacancy reached a record high of 13.0 million sq. ft., a 53% higher rate than the vacancy peak in 1999. The vacancy rate reached an all-time high of 15.1%, surpassing the previous 14.4% record in 1999. This vacancy rate more than tripled the 10-year average of 4.7% before the COVID-19 pandemic.

Rents have decreased for the fourth consecutive year, albeit at a slower rate, following sluggish leasing sentiments and record-high vacancy rates. Overall net effective rents dropped 2.3% YoY, compared to a drop of 7.3% YoY in 2021.

Overall, the office market experienced a decrease in new leasing volume and reached an all-time high vacancy rate. Cost control and escalating vacancy pressure will continue to impact rents until demand becomes strong enough to reverse the trend. As a result, rents across major submarkets are forecasted to decrease further from 0-5% for the year. Despite this weakened sentiment, there is potential for a demand recovery in 2023, particularly from Chinese firms after the border reopens.

Multinational corporations (MNCs) are expected to remain cautious in their expansion plans due to global economic headwinds and high financing costs.

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