Leasing activities are limited

• Net absorption in the overall market was 317,400 sq ft in 4Q22 owing to the realisation of pre-commitments in the new supply. Leasing activities were limited towards the year-end, and expansionary demand weakened amid continued sluggish economic performance. 
• Occupier demand was mainly driven by relocation and upgrading needs. Notably, Konica Minolta Business Solution leased a whole floor (36,000 sq ft, GFA) at the newly completed AIRSIDE in Kai Tak. The tenant will be relocating from Eastern Centre in Quarry Bay.

Six completions during the quarter

• Six Grade A buildings were completed during the quarter, providing nearly 2.3 million sq ft of additional space to the market. Notable ones were Two Taikoo Place in Quarry Bay, The Millennity (98 How Ming Street) in Kwun Tong and One North in Yuen Long.
• Of note, UBS has pre-committed approximately 250,000 sq ft GFA at the XRL site in West Kowloon — a project slated for completion in 2026. The bank will relocate and consolidate their Hong Kong operations from various locations in the city.

Rents and capital values drop marginally

• Rents in the overall market dropped 1.7% q-o-q as all submarkets recorded marginal declines. Notably, rents in Central and Wanchai / Causeway Bay dropped 1.7% and 1.2% respectively. Overall rents recorded a 3.7% drop in 2022.
• Capital values in the overall market dropped by 2.5% q-o-q in 4Q22, while investment yields expanded marginally to 2.9%.

Outlook: Net absorption to improve as domestic economy picks up

• Looking ahead, a recovery in demand is expected when Hong Kong fully reopens in 2023, particularly in the second half of the year. The easing of COVID-19 restrictions in mainland China may also potentially lead to a rebound in PRC demand. The office market is likely to see an improved demand flow, driven by tenants who look for high quality and newer office spaces.
• The vacancy rate is expected to edge higher as the new office supply reaches 3.0 million sq ft next year. While overall office rents are forecast to be flat in 2023, the emergence of new supply will likely keep some submarkets from facing rental pressure.