• Demand for Grade A Office Buildings Fueled by Chinese Enterprises

    11 July 2019

    (10 July 2019, Hong Kong) Strong office demand from Chinese firms, paired with a rise in co-working and decentralization trends, have profoundly impacted the occupancy structure of Hong Kong’s Grade A office market between 2016 and 2019. These findings are highlighted in CBRE’s latest report, The Evolution of the Hong Kong Grade A Office Market: A Telescopic Analysis – 2019

    Following the launch of the 2016 edition of this report, CBRE’s Research team audited 245 Grade A office buildings across Hong Kong, which includes 80 million sq. ft. of space occupied by approximately 11,000 companies, to understand how the market has evolved since 2016.

    From March 2016 to March 2019, the total occupied space in Hong Kong’s Grade A office market increased by 4.3 million sq. ft. to reach 75.7 million sq. ft., while the same period saw 5.8 million sq. ft. of new supply. City-wide vacancy edged up to 5.2% as of March 2019, up from 3.9% three years ago.

    CBRE has identified various trends in the 2016 edition of this report and believed they will shape the future of the Hong Kong office market. Three years on, most of these trends have been realized, which also served as key office demand drivers between 2016 and 2019. Key highlights about these trends include:

     

    Office demand continued to be fueled by Chinese firms but pace of expansion has slowed since mid-2018

     Closer ties between Hong Kong and China have ensured strong office demand from Chinese firms, resulting in a 2.1 million sq. ft. increase in their total Grade A office footprint in the three years to March 2019. Driven mainly by organic growth rather than new set-up, this represents a much faster expansion than the 1.2 million sq. ft. recorded for the three-year period to 2016. Close to 60% of the footprint growth comes from Chinese financial firms. The expansion pace of Chinese firms, however, has slowed since mid-2018 following the escalation of the U.S.-China trade conflict.

    “Chinese enterprises have played a crucial role in driving Grade A office demand in Hong Kong since earlier in the decade. Much of the demand thus far has been coming from the Beijing and Shanghai regions; and firms from the Greater Bay Area have yet to become a major driver. While ongoing uncertainties behind the U.S.-China trade conflict will translate into slower leasing momentum from Chinese enterprises in the short-term future, underlying demand from these firms remain in place and will continue to benefit the Hong Kong office market in the long-run,” said Marcos Chan, Head of Research, The Greater Bay Area and Hong Kong, CBRE.

     

    Improved connectivity accelerates decentralization

     For the fourth year, Hong Kong’s Central district retained the top spot as the world’s most expensive market for prime office rents, according to CBRE’s Global Prime Occupancy Costs Report. High rents, coupled with improved connectivity between the CBD and eastern areas of the city, have prompted many office occupiers to seek decentralization opportunities. Over the past three years, occupiers decentralized a total of 1.3 million sq. ft. of office space from Hong Kong’s Central, Wan Chai / Causeway Bay and Tsim Sha Tsui. This is 48% more than that in the previous three-year period between 2013 and 2016.

     “New buildings usually come with very high building specifications and for those in decentralized locations, only at around a quarter to half of the rents in the CBD. With 85% of the new supply in the next three years coming from decentralized submarkets, occupiers are presented with more cost-effective options for flight-to-quality moves,” noted Alan Lok, Executive Director, Advisory & Transaction Services – Office Services, CBRE.

     

    Co-working moves into the mainstream

     Initially regarded as an option reserved for start-ups, co-working has emerged as an accepted office solution for larger corporates who see the cost and flexibility benefits of this alternative sector. As a result, co-working centers have emerged as strong drivers of office demand, growing in size by 60% to 1.2 million sq. ft. between 2016 and 2019; driven by the rapid expansion by international operators, which has seen 316,400 sq. ft. of the 458,200 total growth was contributed by international operators. Co-working, however, only represents 1.5% of the city’s total Grade A office stock, still a negligible number in terms of total footprint. Co-working centers have been expanding outside of the city core, with 31% (380,200 sq. ft.) of the stock in decentralized submarkets as of end-March, compared with just 22% (169,200 sq. ft.) three years ago.

    “Advances in mobile technology and the evolution of workplace strategy will continue to spur demand for co-working centers. We expect end-user demand to rise but the sector’s growth momentum in the next three years will likely be slower compared to 2016 to 2019,” said Lok.

     

    Tech sector growth not translating into stronger demand for Grade A office space

     Although recent years have seen rapid growth in the number of fintech and startup companies, lower rental affordability and small space requirements have not contributed to stronger demand for Grade A office space. Many start-ups in Hong Kong have instead opted to lease space in co-working centers and technology parks.

    In contrast, large and established technology, social media and e-commerce firms have continued to expand, contributing partly to the sector’s 201,700 sq. ft. growth in terms of total Grade A office footprint between March 2016 and March 2019. This is, however, slower than the growth of 442,500 sq. ft. recorded between 2013 and 2016.

    “The exponential growth in demand for digital services across many commercial sectors will give rise to more start-ups and improve business prospects for established tech companies. Landlords, however, will need to compete for such tenants with existing and future purpose-built tech parks,” said Chan.

    “The Hong Kong office market will continue to evolve in the next few years, with the under-supply pressure gradually easing towards late-2022. Decentralisation will continue to be a major trend. Banks and insurance companies will continue to benefit from the further integration of the Greater Bay Area and the growing need for health and retirement services. Digitalisation of services will however, reduce customer interaction with institutions, therefore the need for front offices. Tech firms, instead, will benefit and hence footprint growth in both traditional offices and purpose-built technology parks,” continued Chan.

     

    Other major structural changes

    The Banking & Finance sector continued to be Hong Kong’s largest occupier group, occupying 26% of the city’s total Grade A office stock. Firms in this sector have also expanded the most in the three years to March 2019, by 1.6 million sq. ft., which however is less than the 2 million sq. ft. gained between 2013 and 2016. Law firms, although only expanded by 41,000 sq. ft. during the period, have decentralized over 163,200 sq. ft. of space to Hong Kong East and Wong Chuk Hang. However, 83% of the legal sector footprint remains in Greater Central. Due partly to subdued global trade flows, logistics, trading and manufacturing firms combined to have downsized by 1.7 million sq. ft. over the three years. Aging population has given rise to stronger demand for medical services, with medical and healthcare centers expanded by 283,100 sq. ft. over the past three years.

     

    Research methodology:

     The CBRE Research team audited a total of 245 Grade A office buildings across Hong Kong, which included 80 million sq. ft. of space occupied by approximately 11,000 companies in over 17,000 office separate premises. The team captured changes in occupancy status of each individual address and analyzed them by industry sector, company origin, submarket and size range, where applicable, between March 2016 and March 2019. Data is primarily obtained from building stacking plans compiled by CBRE, combined with desktop research to gather information on company backgrounds.

     

    To read the full report, click here.

     

     

     

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