HONG KONG'S most prestigious skyscrapers have more empty office space than ever before, underscoring the challenge facing John Lee's government as he tries to revive the city's standing as an international business hub.
Empty premium office space - or the so-called Grade-A stock - has almost tripled in three years to an all-time high of a combined 11.9 million square feet as of October, according to CBRE Group. At Cheung Kong Center, a skyscraper owned by billionaire-developer Li Ka-shing, vacancy surged to 21 per cent in September, from just 5.4 per cent in mid-2020, according to Midland IC&I.
Though commercial-property slump is a global phenomenon after the pandemic ushered in the remote-work era, the record vacancy rates in Hong Kong point to other woes plaguing the world's most expensive market. Lingering Covid curbs - unseen in cities like New York or Singapore - and a sealed border with China have effectively turned off demand from foreign companies and mainland firms. The prolonged weakness has started to hurt even top-tier towers that usually remain immune to downturns.
"Hong Kong has offered itself as two things: a gateway to China and a regional hub," said Simon Smith, a senior director for research and consultancy at Savills. "Current Covid restrictions really deny both of those benefits to office tenants, particularly when people look to Hong Kong as the base for regional headquarters. That appeal has been dramatically diminished."
Cheung Kong Center, which houses Goldman Sachs Group and Jefferies Financial Group, isn't the only tower grappling with tenant outflow. Almost 5 per cent of International Commerce Centre, Hong Kong's tallest building that's home to Morgan Stanley and Deutsche Bank, is empty, up from 1 per cent in mid-2020. Central Plaza, a high-end building in the Wan Chai area popular with foreign embassies and financial firms, had 9.4 per cent of its space vacant, versus 3.2 per cent.
CK Asset Holdings, owner of Cheung Kong Center, and Sun Hung Kai Properties, which owns ICC and Central Plaza, didn't immediately respond to emails seeking comment on the vacancies.
The government has been trying to stem the exodus, but some experts say it needs to do more.
In the four months he's been the chief executive of the special administrative region, Lee has eased most travel and quarantine restrictions and unveiled a slew of measures aimed at wooing foreign talent. The city, which is hosting a much-anticipated banking summit early next month to mark its reopening, is considering concessions for attendees, including allowing those who test positive for the virus to skirt isolation rules and exit on private jets, Bloomberg News has reported.
These steps do help, but Lee hasn't set a timeline to return the city to pre-pandemic norms, said Eric Zhu with Bloomberg Economics. "Without this, regaining ground lost during the pandemic to Singapore and other rivals will take time," he said.
The commercial downturn, combined with a tumbling residential market, is adding pressure on the city's developers, which are already dealing with shrinking profit margins.
When global corporations review expenses amid an increasingly difficult business environment, an expensive office market like Hong Kong's "that is head and shoulder above its peers in Asia is going to be a target" for cost-cutting measures, Smith said.
Making things worse, Hong Kong is seeing a surge in high-end office supply for the first time in more than a decade. In the island's main business district, developers CK Asset and Henderson Land Development are building a skyscraper each, which will be completed next year. Henderson Land also has a harbour-front commercial project with office space, which is set to be partially completed in 2027.
There are still some bright spots in the market. Sun Hung Kai's commercial project atop the high-speed railway station connecting to the mainland China recently signed UBS Group as its anchor tenant occupying nine floors. The project is expected to be completed in 2025.
But broadly, these future projects are adding more competition in a tenant-starved market and it's unlikely there will be sufficient demand to fill the upcoming space in the city anytime soon.
"Demand is pretty tepid at the moment," Smith said. "We are not seeing a great deal of pre-commitment" to the new projects. BLOOMBERG