High vacancy rates hinder office, retail rent recovery

Office rents will likely decline 5-10% over 2021, CBRE said.

The Hong Kong commercial real estate market has started picking up, as investment funds show renewed interest in the opportunities available; but recovery in the office and retail sectors may not come as easily due to high vacancy woes.

“The Hong Kong economy is set to encounter a meaningful rebound in 2021, amidst a low base of comparison. Demand for commercial properties is expected to gradually catch up, but high space availability will prevent rents from rebounding in the office and retail sectors,” Marcos Chan, Executive Director and Head of Research, CBRE Hong Kong, said.

Gross leasing volume of Grade A office rose 26.8% to 840,500 square feet in the first quarter, compared to the last quarter of 2020.

Overall net absorption stood at -289,000 sq. ft., further deteriorating from -245,100 sq. ft recorded in the previous quarter. This is also the sixth consecutive negative quarterly figure recorded.

Moreover, overall rents continued to contract, but at a slower rate of 3.3% during the first quarter.

“The piled-up space continues to allow higher degree of flexibility in rent negotiations with landlords. Rents are expected to face prolonged pressure in the remainder of the year as vacancy continues to overhang. While rents have come down by 3.3% in Q1 2021, the full year will likely see a 5%-10% drop,” Ada Fung, Head of Advisory and Transaction Service – Office Services, CBRE Hong Kong, said.

Retail rents were up 2.7% year-on-year in January and February, primarily due to a low base of comparison.

High-street shop also vacancy increased to 17.8% after store closures in high-street. Of this, the highest vacancy was recorded in Tsim Sha Tsui at 21.7%.

Commercial property deals, meanwhile, reached $9.8b as investors are driven by low prices and liquidity. CBRE noted this is also the second highest quarterly investment since the third quarter of 2019.

“While the office and retail sectors are struggling with high vacancies, investors were particularly keen on industrial properties,” Reeves Yan, Executive Director, Head of Capital Markets, CBRE Hong Kong, said.

Rents in the industrial market climbed 1.1%, reversing the downward trend recorded in the last four quarters. Vacancy also dropped 3.2% from 3.6% in the previous quarter.

Industrial deals also contributed $4.3b in the quarter’s sales volume.