For investors, there are now just 2 kinds of offices: the best and the rest
From Hong Kong to New York, a deep divide is opening up in office markets around the world, as tenants compete for space in prime buildings while other properties face falling rents, low occupancy and financing pressures. The divergence reflects a global flight to quality, but also a disconnect between improving leasing fundamentals and a recovery in property values, according to analysts at…
A stark division has emerged in global office markets, with investors now discerning just two types of properties: the elite and the rest. This disparity is evident from Hong Kong to New York City, where tenants are vying for prime real estate while others grapple with falling rents, low occupancy, and financing challenges. The phenomenon is attributed to a global shift towards quality-oriented investments, but also a disconnect between improving leasing fundamentals and a sluggish recovery in property values, as per Morgan Stanley and Jones Lang LaSalle (JLL) analysts.
Several factors contribute to this development. Limited new supply in prime locations, city-specific approaches to removing obsolete offices, and companies' emphasis on attracting talent through superior workspaces all play a role. Tokyo has emerged as the world's most supply-constrained market, with vacancy rates below 2 percent. London and New York City are also experiencing tight inventory, with Manhattan achieving top-tier rental rates.
The K-shaped recovery is most noticeable in Hong Kong and Manhattan. While headline vacancy rates in these regions mask a growing disparity, prime business districts are experiencing scarcity, supporting rents despite high interest rates. In Hong Kong, grade-A office vacancy in Central dropped to 7.8 percent in Q3, driven by financial services and hedge funds competing for premium assets. Meanwhile, less-fashionable districts like Kowloon East saw vacancy rates soar to 19.5 to 20 percent, with rents continuing to decline.
Similarly, Manhattan shows a marked divide. Prime submarkets such as Chelsea and Park Avenue have vacancy rates of around 5 percent, while the Financial District languishes at 18.4 percent. Despite a 7.3 percent rise in gross office rents in the year to date, Hong Kong's grade-A office capital values remain roughly 50 percent below their 2018 peak. In Manhattan, class-A rents reached $81.94 per square foot, up 4.3 percent year on year, with leasing volume over the past year matching pre-pandemic averages.
The recovery in rents has yet to lead to a full restoration of property values. Even as Hong Kong recorded 293 office sales in Q3, up 25.8 percent from the previous year, the value of transactions increased by 12.1 percent year on year, reaching HK$6.13 billion. However, many of these sales involved developers' new projects, while second-hand transactions remained weak. Some mortgage sales were offered at discounts of up to 25 percent compared to original purchase prices as lenders sought to recover capital.
The ability to remove obsolete office space also shapes the recovery. Manhattan's office construction pipeline has shrunk to 2.7 percent of existing stock, down from about 12 percent in 2019. Nonetheless, office-to-residential conversions are helping to eliminate older buildings from the commercial market. In contrast, Hong Kong faces regulatory, planning, and ownership hurdles that make large-scale conversions more difficult, leaving more existing office space competing for tenants.
Morgan Stanley notes that while rezoning could limit future commercial supply, completed offices typically remain in use.
Written by urgent.news from SCMP Business's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
