Biggest Office Glut since 2005 Hits Hong Kong Commercial Real Estate amid Worst Recession on Record

Several unique factors, topped off by the enduring trend to working from home and an exodus of companies.

By Nick Corbishley, for WOLF STREET:

Office demand in Hong Kong, one of the world’s most expensive property markets, remains “extremely weak,” says Cushman & Wakefield. More and more companies are allowing a larger percentage of their workforce to work from home on a long-term basis, reducing their office space needs. By the end of last year, overall net absorption — the sum of square feet that became physically occupied, minus the sum of square feet that became physically vacant — of Grade-A office space had slumped to -2.3 million square foot, the steepest annual drop on record.

Many companies are downsizing as their need for space shrinks. Homegrown luxury goods company Lane Crawford relinquished 19,400 sq ft at One Island South in Wong Chuk Hang. FTLife Insurance released an entire floor (16,500 sq ft) of the FTLife Tower in Kowloon Bay. DHL reportedly leased 90,900 sq ft at International Trade Tower in Kwun Tong, downsizing and relocating from Kowloon Bay.

Coworkers’ centers like WeWork and Regus also scaled back their presence in the city for the first time since 2016, according to CBRE. While some closures were planned before the pandemic, new lettings by coworking centers shrank by 39% year-over-year in 2020. At the same time, travel restrictions led to a sharp fall in new leasing demand from mainland Chinese firms, which plunged by 74% year-over-year and 62% from 2018 and 2019, respectively.

In other words, a lot more office space is hitting the market than is leaving it. Total vacant office space rose to 8.12 msf in the fourth quarter, up 69% year over year. “A rising amount of surrender and sublet space” pushed the availability rate for all grade office buildings one percentage point higher to 12.6%, up from 8.8% in Q4 2019, says Cushman & Wakefield. “It’s the highest level since Q1 2005.”

In Q1 2005, Hong Kong’s commercial real estate sector was emerging from the debris of the first SARS pandemic (2002-04). After being identified by W.H.O. as one of the areas affected by the virus, investment sentiment and activity in the city froze. Office prices dropped around 15% in 2003. Grade A office rents in the city declined by 17.2%. Central Business District, home to some of the most expensive commercial real estate, dropped 22.5% year-on-year. Yet even at the height of the SARS crisis, Hong Kong’s GDP grew by 3.1% in 2003 and 8.7% in 2004. And that helped pave the way for a strong recovery of the commercial real estate sector.

Things are very different this time. The city has so far racked up five consecutive quarters of economic decline, from the third quarter of 2019 to the third quarter of 2020 (the figures for the fourth quarter haven’t yet been published). Hong Kong is now in the grip of its worst recession on record. The economy shrank by 9.1% in the first quarter, 9% in the second and 3.5% in the third. Unemployment has risen to 6.6%, the highest rate since the last quarter of 2004, when it peaked at 8.4%.

Hong Kong’s office market has been hammered from all directions. It has been battered by the pandemic-induced Work-From-Home revolution, which has prompted many companies to cut back on office space. It was pummeled by the pro-democracy student protests that continued to rock the city in the first half of 2020, until they met the immovable force of the Chinese Communist Party. Beijing’s subsequent imposition of the national security law sounded the death knell of Hong Kong’s “One Country, Two Systems” framework, which had granted the city a considerable degree of autonomy following its handover from the UK to China in 1997.

Against this backdrop, office rents in Hong Kong plunged at their fastest rate since the Global Financial Crisis. In the fourth quarter, average rentals experienced the steepest quarterly decline since Q2 2009, falling by 6.3%, according to Cushman & Wakefield. These crumbling prices come on top of the fall in prices that already occurred in 2019. That brought the full year decline to 19.3%. Of all the city’s districts, Greater Central, where many of the most expensive office properties are located, came out worst, with rentals falling 6.7% quarter-over-quarter and 22.4% year-over-year on average respectively.

The new security law brought a certain amount of order and stability to the city, which the local government hopes will spur mainland companies to set up shop in the city. But it also set in motion a gathering exodus of international companies. Now that Hong Kong has been subsumed into the mainland’s realm, the city appears to have lost some of its allure as an international business and financial hub.

The Vanguard Group, The Motley Fool, hedge fund Elliott Management… 52 banks and financial companies and 24 insurance firms are already packing their bags. Many global luxury brands are relocating to mainland China, to be closer to their major growth market. Versace, Salvatore Ferragamo, L’Oreal and LVMH-owned Bulgari, Fendi, Givenchy and Celine all reduced headcounts in their Hong Kong headquarters last year and moved resources to the mainland, reports South China Morning Post.

Cushman & Wakefield notes that while vaccines may offer a glimmer of hope in the long term, the near-term impact of vaccines on the local market will be minimal. Firms continue to face a bleak economic environment. Leasing demand is likely to remain subdued, particularly in the first half of the year, and surrendered space may continue to climb. As a result, “although new supply is set to remain limited, vacancy rates are forecast to climb further, continuing to put pressure on rentals… (which) are forecast to fall between 11% and 16% over 2021.” By Nick Corbishley, for WOLF STREET.

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  33 comments for “Biggest Office Glut since 2005 Hits Hong Kong Commercial Real Estate amid Worst Recession on Record

  1. Seneca’s Cliff says:

    Bug meet windshield

  2. MonkeyBusiness says:

    I think a certain Hong Kong billionaire is close to bankruptcy after personally taking over the mortgages of a number of buildings in 2018 from his own holding property.

    The timing could not be worse.

    The Hong Kong government should bail him out.

    If we can’t protect the rich, there’s nothing to believe in in this world.

    • MonkeyBusiness says:

      Pan Sutong. That’s the name. If you are interested in the details. Look for the following SCMP article:

      Hong Kong property tycoon loses billions as business empire unravels in battle with debt collectors

      • Mira says:

        Hey, where does everyRICHone live .. the writing has been on the wall in capital letters & for a good long while .. why does business think & plan on the immediate level & not long term ??

        Also .. don’t put all your eggs in one basket.

        “If we don’t protect the rich” .. save who ?? us .. are you saying we should pity this mug .. have you got that much money in your pocket because I’m not giving a dime to this show pony ??
        Self absorbed corporate rich boy deserves to go broke ..
        “Didn’t you do your research hot shot & now your broke .. gosh” ??

        Working from home is from medieval times up to the Industrial Revolution .. the Industrial Revolution pulled workers out of the house.
        The Industrial Revolution brought profound changes for men & women alike.
        The industrial age birthed a new movement of skilled workers & set up a working away from home model.
        Today it is becoming increasingly outdated [in the Western work place ??] because in India factory work is abundant.
        So it is that Corporate is moving away from China .. in which direction was rich boy looking ??
        The bug meets the windshield is most apt.

  3. RightNYer says:

    Hopefully the Fed buys all non-securitized mortgage loans and CMBS in the coming years. There’s no reason why any bondholder should take a haircut on anything.

  4. Curious says:

    How, during Hong Kong’s worst recession on record, does its main stock index, Hang Seng, go up 5% during the last 12 months? But then the same question relates to the U.S. market, where the DJIA has gone up 6%.

    Considering that the Dow dropped 50% (!) from its 2007 peak during the 2008 recession, something doesn’t seem right.

    • Anthony A. says:

      Central Banker Prop Up. It will end…..someday.

    • qt says:

      If you recall, the stock market didn’t bottom until March of 2009. These things take time especially with the FED’s QEs and ultra low interest rate. We may pass the March 2020 lows but I don’t see it happening anytime soon. Margin debts are at all-time high and the markets are trading crazy speculatively.

      One possible scenario: Wall St Hedge Funds plot revenge on the WSB followers by coordinating “sell all stocks and assets at the same time” event. With so many inexperienced, young traders trading on the margins, the hedge funds will force a brutal margins call on those Robinhood traders forcing them to increase their reserve or sell their stocks low. Of course, the “little people” can’t access billions in zero interest loans and will be forced to sell low right into the hedge funds’ hands.

      • Curious says:

        We know the pandemic caused the sharpest and deepest economic contraction since the Great Depression. Millions lost their jobs and remain unemployed, businesses are closed and closing daily, the economy is in recession, or worse, and the pandemic is not even under control.

        So it seems that the stimulus funds meant to help workers and small businesses survive, with direct payments and low-interest rates, are being spent on stocks instead of food and rent.

        That implies that the faster congress moves to print up another few trillion to provide economic relief, the quicker and further stocks will rise, even though it’s the “big people,” the institutional investors that own 80% of stocks. Yet, based on the real-world expectations, institutions should be the leading sellers, not buyers in today’s climate.

        • MonkeyBusiness says:

          Apple had its first 100 billion quarter. Not even rich people could buy that many gadgets.

          Government workers got extra pay, etc, etc.

          No one’s doubting that plenty of people are suffering, but some people got extra income too.

          RobinHood nation where the rich takes from the poor. Awesome stuff.

        • RightNYer says:

          Monkey, it’s easy for Apple to have a great quarter when consumers are given $1,200 and $600/week in unemployment in “stimulus” and when other consumers don’t spend money on travel and splurge on iCrap instead.

        • MonkeyBusiness says:

          RightNYer, it doesn’t matter where the money comes from. If they were desperate, consumers would use the money for necessities, but no they weren’t desperate. They could afford to spend the money on nice to haves.

        • RightNYer says:

          Of course they weren’t desperate. Not only were the truly suffering given free money in the form of enhanced unemployment, but they were told they didn’t have to pay their rent. What did our foolish leaders think was going to happen?

          In all seriousness, I do think there is a percentage of the population that is truly suffering (people who worked in good jobs in hotels and now can’t find anything because they’re too old to be retrained, at least in the eyes of other employers) but most people did not suffer. And those that didn’t suffer didn’t save their windfall, they splurged.

        • char says:


          Government support is given so the none contact part of the economy does not collapses like the restaurant and movie theater part of the economy. That they have a bumper year is in fact good. Besides the economy is not a morality play. Running it like it is leads to very bad results.

    • char says:

      HK is a small place. It would not surprise me if HK is a small market for most of the stocks in the Hang Seng index. If they are mainly Chinese companies than i would expect a great year for the Hang Seng

  5. David Hall says:

    In times past when apartment rents grew faster than office rents, landlords converted office buildings to apartment buildings.

  6. Wisoot says:

    Shenanigans Curious. The higher you go the further you have to fall. Apt for HK. Looks like Blackstone group are being shipped out. Their risk register must be pages.

  7. Martha Careful says:

    Re: “while vaccines may offer a glimmer of hope in the long term, the near-term impact of vaccines on the local market will be minimal.”

    Agree totally in regard to this Hong Kong story and think this is a matter of global decay — and something that won’t vanish in the next 3+ months.

    The adaption to new pandemic social distance will be profound in many ways as people and corporations, as well as countries reinvent normalization.

    I found this interesting this morning and think it’s related to this theme:

    Statements and Speeches of Ben S. Bernanke : U.S. Financial Markets : Testimony before the Committee on Financial Services, U.S. House of Representatives
    September 24, 2008

    ” … On a more positive note, oil and gas prices reached earlier this summer, contributing to a recent improvement in consumer confidence.
    However, the weakness in the fundamentals underlying consumer spending suggest that household expenditures will be sluggish, at best, in the near term.”

    Ben was essentially thankful that weaker oil demand was likely to help tamp-down transient inflation during the GFC recovery. With the pandemic, various industries that have crashed will subdue inflation as other hotspots point to insane off the chart growth. It’s different this time, isn’t it?

  8. WES says:

    Maybe Nick has to be politically correct, but no mention is made of the fact China is currently forcing Hong Kongers with dual citizenship to chose one.

    China does not recognize dual citizenship.

    There are about 5.4 million Hong Kongers who hold rights to gain UK passports and residency.

    An additional 300,000 Hong Kongers hold Canadian citizenship.

    It will be interesting to see how many elect to leave, if any.

    • Wisdom Seeker says:

      Nick also was far too soft on the fundamental issue with Hong Kong – it’s no longer a capitalist democratic bastion providing a useful intermediation role in global trade with China.

      Now it’s just another tiny part of an extremely powerful, massively corrupt totalitarian regime, hostile to human rights, utterly intolerant of dissent, seemingly unable to compromise on the smallest issue, led by a dictator-for-life who “disappears” any credible opposition and whose foreign-policy mouthpieces are increasingly strident and aggressive.

      Why would productive, talented, creative and wealthy people want to stay?

      Hong Kong used to be a thriving “Asian Tiger”, a model of Asian economic development and progress. Now it’s just another megacity in China.

  9. james wordsworth says:

    HK used to be awesome. Now its on its way to becoming just another backwater.

    But that was always Xi’s plan.

    • Brant Lee says:

      Does anyone think there are not short and long-term targets on Taiwan, Japan and others in the region? Many of the HK protesters have been hauled away for permanent vacations in mainland China and the always grinning Xi looks like such a nice accommodating guy.

      • char says:

        Many? A few. And they are still in HK. Jailing many or moving them to the mainland would be counter productive and costly.

  10. morpheus says:

    Does Hong Kong really exist anymore? or has it been swallowed up by the CCP?

  11. IanCad says:

    Failing to learn the lessons from their ventures in Hong Kong; Tenacity Group is now trying the same formula in the City of London with new 32 storey office project.
    A statement from its founder and boss, Patrick Wong, reveals the denialism so many affected with:

    “Tenacity founder and chief executive Patrick Wong said: ‘Despite the events of the last 12 months and the changes and challenges that we have all witnessed, we are quite clear that the era of the office is not over – far from it. We believe the future is bright for the right kind of space….”

    It seems penury must precede reality.

  12. YuShan says:

    We hear a lot of positive news from mainland China, but don’t forget that they have the biggest debt bubble the world has ever seen, most of it created since 2008. It really eclipses what happened in the USA before the GFC.

    My friend who lives in Shanghai can now sell her flat for 8 times what she paid in 2004. Rent yield is about 1.5% but central bank policy rate is about 4%. Many buildings are empty because then they remain “new” and increase more in “value”.

    GDP is probably massively overstated too, because malinvestment is not written off. And there is a lot of it, because the Chinese government forces banks to lend in order to meet their GDP growth target.

    Social security is crap and people have most of their wealth in this. It will be really nasty when this bubble bursts, potentially destabilising the regime. Then, they will go to war against Taiwan to distract the public.

    Then there is this massive gender imbalance. In the most testosteron fueled age (15-24yr), men outnumber women by 17%, i.e. one 1 in 7 men are going to be incels. And because in China everything is about money, who is incel is decided by how much money you have. That’s millions of testosteron-fuelled poor incels who basically have no stake in the system at all. Talk about instability risk!

    • R Hughes says:

      It would be valuable if we could read other boots on the ground reports, like we get from various other posters here on WS for condition in US and Euro. Guess getting real info out of China is very difficult.

      • char says:

        getting the info out is not hard, it is not exactly a secret. But finding an English speaking market for China will be number 1 before 2040 is hard

    • char says:

      8 times in 16 years. A doubling every 5 years. That is what the Chinese economy did in that time span so price development is not excessive. and that does not even include inflation.

      Debt is largely state companies to in the end the central bank. That is not really debt. More an accounting fiction

      Taiwan is 20 million people 100 miles from China with 1.4 billion. Don’t see it as a fight China can loose. Especially considering the expectation that half the army will cave with the first contact with the enemy

      China is rich, Africa is poor. I see the incels more in Africa.

  13. Mira says:

    Confucius Say:
    “Wealth consists not in having great possessions, but in having few wants.”

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