On June 26, the "Hong Kong Real Estate Market Observation" report released by Jones Lang LaSalle showed that as of the end of May, the vacancy rate of Hong Kong's overall Grade A office market rose to 13.5%. At the same time, the vacancy rate in Wan Chai/Causeway Bay and Hong Kong Island East The rates dropped by 0.2 and 0.1 percentage points respectively.Zhong Churu, senior director of Jones Lang LaSalle's research department, pointed out that the overall market actual rent fell by 0.8% month-on-month in May, marking the 25th consecutive month of decline since May 2022. Among them, rents in Central have fallen the most, falling by 3.4% this year. There was less new demand and weaker market sentiment. The overall vacancy rate reached 12.3% in May, a record high.

Reasons for rising vacancy rate

●Direct reasons: In May, two new commercial building projects, Phase II of the Cheung Kong Group Center in Central and No. 350 Kwun Tong Road, were completed, driving the overall Grade A office market to record a net absorption of 21,200 square feet. The new supply has caused the vacancy rates in Central and Kowloon East to rise to 12% and 18.5% respectively.

●Main reason: Zhang Qiaochu, managing director of Hongliang Consulting and Appraisal, believes that the rising vacancy rate of office buildings is a global trend. Due to the increase in work from home after the epidemic, the slowdown of the expansion of foreign-funded enterprises in Hong Kong, and the supply of Grade A office buildings including Central With this huge impact, it is expected that Hong Kong’s vacancy rate will likely rise further in the next five years.

Office market outlook for the second half of the yearOverall, Knight Frank expects that under the current macroeconomic conditions, office leasing demand in Hong Kong Island will remain weak in the second half of the year, and core low-end rents will continue to fall. It also expects the average rent of Grade A office buildings in Hong Kong Island to fall this year. 3% -5%. In terms of office transactions, the bank expects that the main buyers, private equity real estate funds and insurance institutions, will continue to adopt a wait-and-see attitude in the short term.Hong Kong's retail industry faces challenges due to declining consumer confidence, continued weakening of competitiveness and changes in tourism consumption patterns. Hong Kong's retail sales have continued to decline this year, and luxury goods sales have also fallen by 7.8%.

Luxury goods consumption that is willing to pay high rents is no longer booming, which has also led luxury retailers to adjust their store opening and expansion strategies. Some mainland catering operators who want to test the Hong Kong market have also begun to feel the pain of the downturn in Hong Kong's retail industry and have begun to usher in a new era. Store closing trend. Knight Frank has a conservative outlook for retail sales performance in 2024. Under this expectation, the agency expects overall retail rents to remain roughly flat for the remainder of 2024.

Is there any hope for office building recovery?Despite the challenges, office leasing volume in Hong Kong has increased for four consecutive quarters, reaching 2.3 million square feet in the first half of 2024, the highest half-year closing since the first half of 2019. Net absorption reached 351,900 square feet, remaining positive for the fourth consecutive quarter.Knight Frank also revealed some optimistic information in its report on Hong Kong office buildings. For example, there has been some new demand from mainland companies in the region, which are inquiring about high-quality office space below 5,000 square feet; on the other hand, despite the general downturn in the financial industry , but there are still some foreign financial institutions with expansion plans, and these financial institutions are mainly concentrated in the insurance field. In May, new leasing transactions recorded in the market included AIA’s expansion in Gateway Tower 2, leasing a full-floor building area of ​​18,400 square feet.

Sam Gourlay, head of Jones Lang LaSalle's Hong Kong commercial department, said that insurance companies are still the most active in the office leasing market. Although new supply has pushed up the office vacancy rate, new commercial building supply will still be gradually absorbed by the market, because many tenants have begun to look for commercial buildings to improve the quality of office space while rents have dropped significantly.