Net office absorption shrinks by the most in a quarter in 18 years, pushing overall availability higher to 10%

  • Grade A office
    rents in core districts fell sharply in Q1 2020 with those in Greater Central
    and Wanchai/Causeway Bay dropping by 4.0% and 5.2% respectively from last
    quarter, under the impact of the COVID-19 pandemic and a subdued economic
  • Retail
    market indicators plummeted, with the F&B sector the hardest hit by the
    pandemic that could see around 1,000 restaurants close this year.

HONG KONG, CHINA - Media OutReach - 7 April 2020 - Grade A office rental declines accelerated in all office submarkets in Q1 with the core areas being the hardest hit as leasing demand weakened in the face of the COVID-19 pandemic which drove local business and economic performance into disarray. The retail leasing market bore the brunt amid a severe drop in tourist arrivals, retail sales, and customer foot traffic due to the border closures and other containment measures.


For the second consecutive quarter, net absorption in
the overall Grade A office market fell into negative territory, to -524,947 sq
ft in Q1, as compared to -377,990 sq ft last quarter. Limited leasing demand in
a nearly frozen market resulted in the largest quarterly shrinkage in net
absorption in 18 years, with demand shrinking the most in the finance, insurance
and co-working sectors.


Mr Keith Hemshall, Cushman & Wakefield's Executive
Director, Head of Office Services, Hong Kong
, commented, "In addition to
corporations holding off on any expansion plans in the face of uncertainties or
due to cost constraints, the pandemic has forced a trial of remote or flexible
working. With this as an option, some companies will consider the viability of
cutting leased space to save costs, while maintaining operations without
compromising the level of productivity and service quality. We expect these
considerations will further undermine leasing demand and the amount of net
absorption in the near future."


As leasing demand shrank, overall availability climbed
to 10% or the highest level in a decade, with Kowloon West and Kowloon East at
the high end, recording availability of 14.6% and 14.2% respectively.
Meanwhile, Grade A rents which have been softening since Q2 2019 saw the rate
of decline accelerate in Q1 2020. This was most apparent in the core submarkets
of Greater Central, Wanchai/Causeway Bay and Greater Tsimshatsui where rents
fell by between 4.0 and 5.7% quarter-on-quarter. Both Prime Central and
Wanchai/Causeway Bay recorded double-digit drops in rents from a year ago. Even
in Hong Kong East where availability was the lowest among the submarkets, at 5.3%,
rents in Q1 fell slightly, by 1.2% quarter-on-quarter.

Mr John Siu, Cushman
& Wakefield's Managing Director, Hong Kong
, commented, "With overall
availability reaching the 10% benchmark, landlords will become more concerned
about back filling the vacant space in their buildings. The market is becoming
more tenant-friendly, and demand is expected to remain weak under the impact of
the pandemic and potential global economic recession. We forecast overall
availability to remain in double digits for the remainder of 2020, pushing down
rents by 13-18% overall for the full year and 15-20% down in Greater Central."


In many ways the COVID-19 pandemic has
intensified the negative impacts on the local retail market caused by the
social unrest in 2019. Due to travel restrictions, quarantine requirements and
border control measures, tourist arrivals dropped 98% year-on-year to a total
of just 199,123 in February. During the first two months of 2020, retail sales
plunged across the board, led by declines in jewelry & watches (41.6%) and
medicines & cosmetics (32.3%).


The adverse effect on high street rents was
immediate: Central rents plummeted by 20% quarter-on-quarter in Q1 while in
Causeway Bay, Tsimshatsui and Mongkok they fell by 15% in the quarter. In the
non-core areas of Tuen Mun and Yuen Long rents fell by around 10%. Vacancy
rates rose in all core areas, led by a jump of 7.3 percentage points to 20% in
Mongkok -- a decade high -- while vacancy rates in Causeway Bay, Central and
Tsimshatsui climbed to 5.3%, 14.2% and 4.8% respectively.


The F&B sector was undoubtedly hard hit by
the pandemic. Restaurant receipts are forecast to shrink from HK$26.0 billion to
HK$23.6 billion in the span of Q1 (down by 9.2%, or 25.1% year-on-year). Also,
it is worth noting that over the past decade from 2008 to 2019, the number of
F&B operators (in terms of the number of licenses) has grown at a faster
rate than that of restaurant receipts, by 50% as compared to 44%. The abrupt
plunge in F&B business today suggests the current volume of operators is no
longer sustainable amid the increased competition, and it is expected that
around 1,000 operators may have to close their business within this year.


Mr Kevin Lam, Cushman & Wakefield's
Executive Director, Head of Retail Services, Hong Kong
, said, "Due to the double whammy of the
social unrest and COVID-19 outbreak, the retail business is likely to remain
extremely bleak over the next few months. The situation remains very fluid, but
we expect that once the pandemic is over, retail sales and the F&B business
will return to a similar level as in January, a point when the market impact
from the social unrest had subsided and that from the pandemic had yet to be


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