The escalating trade war between the US and China has cast a shadow over Hong Kong’s Grade A office market. However, with both countries recently agreeing on a 90-day truce, how this tit-for-tat brinkmanship plays out remains unclear.

Trade war or not, there’s one key indicator that’s flashing amber for Hong Kong’s office market ahead.

As a supply constrained market, Hong Kong’s office rental cycles closely are dictated by the ebbs and flow of underlying demand, which can be approximated with business cycles. From Figure 1, we can see that the Hong Kong’s Grade A office market rental cycle has historically held a very strong relationship with the US business cycle. This is not surprising given Hong Kong’s status as an open economy and its strong ties to the US; most notably through trade and the city’s currency peg to the US Greenback.

As it approaches the 10 year mark, the US economy is now clearly in the latter stages of its current growth cycle. Moreover, the business cycle is now at the upper bounds—2 standard deviations—of its long-term growth limits, suggesting that risks of an economic downturn or recession within the next 12-months is high. Short-term indicators, such as the recent flattening of the yield curve and recent stock market trends, as highlighted in our December Economic Monitor, would support this view.

Of course, the US business cycle is not the only precursor for turning points in the local rental market. Demand for office space is also dictated by local/regional demand drivers, which are reflected in the Hong Kong business cycle (Figure 2). However, with the economy growing around long-term trend levels in recent years, the current Hong Kong GDP gap does not point to any immediate downside risks ahead.

So, this brings us back to the current state of the US business cycle. If history repeats, then the US is on the cusp of a recession; trade war or not. For investors and occupiers, now is a timely reminder that when the US economy sneezes, the Hong Kong office market usually gets a cold.

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