As the pandemic situation in Hong Kong has largely been kept under control, office occupiers in the city have resumed making decisions on real estate requirements from the beginning of 2021. The overall gross leasing volume in the Grade A office market increased by 70% y-o-y during the first eight months of the year. Nevertheless, net absorption was still negative as many corporate tenants downsized to save rental costs, and leasing market activities mostly involved relocation or consolidation instead of expansion.
In this dynamic leasing market, a noticeable trend of office occupiers upgrading their office premises, commonly known as the flight to quality, has been observed. As rents have corrected to a more affordable range and the elevated vacancy rate offered more diverse options, some tenants took the opportunity to move their offices to higher quality buildings with sophisticated design and better specifications. The flight to quality was also manifested by the greater demand for premium Grade A office buildings, defined by JLL as “Grade A1” buildings. In January-August 2021, slightly positive net absorption was recorded for Grade A1 buildings, while lesser quality buildings registered net withdrawal (Figure 1).
Figure 1: Grade A office net absorption by sub-grade in January-August 2021
Source: JLL Research
The flight to quality trend has two major implications for office landlords. Firstly, the office is here to stay. As the pandemic prompts an extended period of working from home, fatigue grows and productivity appears to decline. This is exacerbated by Hong Kong’s tight living environment, which many employees may find unsuitable for working. Moving forward, employees may look for flexibility in working hours and options to work in the office or remotely. Top employers are upgrading their office premises, as an outstanding human-centred office is critical for employee retention.
Secondly, office occupiers are reconfiguring their real estate requirements as employees return to work. Most tenants aspire to quality, future-proof offices with due consideration to flexibility, wellness and sustainability. To entice these tenants into committing to new office space, landlords strive to enhance their assets with flex space, wellness amenities and technology. The adoption of asset enhancement solutions can improve the human working experience and workplace efficiency to serve occupiers’ post-pandemic needs better. As office occupiers are taking the flight to quality, the cream of the crop will meet robust demand and command a higher rental premium over the rest of the market.
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