According to JLL's latest Hong Kong Monthly Market Monitor report, returning office stock arising from expiring leases led to a net withdrawal of 16,000 sq. ft in the Grade A office market in June 2017. Yet despite the contraction of the occupier market, the leasing activity remained robust, led by demand from co-working and serviced office operators seeking out expansion opportunities.
The last few months has seen an unprecedented amount of take-up from the co-working sector with both new entrants and traditional occupiers. "In a market where net demand growth has been thin, the arrival of co-working space operators represents a welcome source of new demand for the leasing market," says Paul Yien, Regional Director of HK Markets at JLL.
Last year, JLL helped WeWork secure a flagship location along Jaffe Road in Causeway, leasing 93,000 sq. ft over nine floors at Tower 535. Since then, the market has seen a number of other operators, including some of the city's incumbent serviced office operators establishing and announcing plans to set up new locations in the city. Regus, for example, has reportedly just pre-committed 26,800 sq. ft at Lee Garden Three in Causeway Bay. Naked Hub, a Shanghai-based operator, has planned to expand in Hong Kong and has leased sixteen floors with 55,000 sq. ft at EIB Centre (will be renamed to Bonham Circus) in Sheung Wan.
The growing popularity of co-working offices in Hong Kong is not only being driven by start-ups but also increasingly by larger corporate occupiers looking to better utilize their real estate within the city; taking advantage of the greater flexibility, convenience and savings that can be provided by operators.
"As most Grade A offices in Central may be beyond the reach of the business models adopted by co-working space operators, the impact of these new market entrants will be felt more in Grade B offices and office markets outside of Central. Landlords may also consider bringing in co-sharing office operators into their portfolios to help broaden their tenant base," Denis Ma, Head of Research at JLL, points out.
Beyond co-working space operators, PRC banking and finance firms continued to be the key drivers of leasing activity in Central, accounting for about 46% of all new lettings in terms of floor area. China RE Asset Management relocated and expanded in-house by 11,200 sq. ft at Three Exchange Square while a Mainland China investment company leased 10,800 sq. ft at 181 Queen's Road Central.
Rents in Central advanced 0.3% m-o-m, surpassing the record highs set in 2008. Rents in all other major office markets remained broadly stable against tight vacancy rates.