Rental Hikes Hasten the Advent of Diversified Office Solutions
Rental spike in the core-CBD area has put many traditional office tenants on the defensive. Whereas many have chosen to move away from Central to prevent rental costs from eating into their profits, Colliers’ recent Occupier Survey reveals that new office solutions will be the answer to the dilemma between business expansion and restrained office budget.
By Zac Tang, Senior Analyst, Colliers International
Hong Kong office rents hit a new record high in August with Grade A office rents have increased by 1.3% YTD. With every possible sign suggesting the continuance of this upward trajectory, Colliers has conducted the first Hong Kong focused Occupier Survey investigating the rental strategies across various industries in Hong Kong to cope with different disruptions from business environments, workplaces and technologies. Out of the 174 surveyed companies, 84% of them hold a positive outlook on their business prospects, with 38% of respondents expecting more hires in the coming years. However, the expansionary business sentiment conflicts with the anticipated flat office budget, companies are bound to explore various office strategies to rein in on soaring office rents.
Rising Popularity of Fringe-CBD and Decentralised Locations
Before the launch of the survey, the high rent condition in the CBD has already led to several prominent decentralisation cases. The relocation of Freshfields Bruckhaus Deringer, AllianceBernstein and BNP Paribas has put Quarry Bay under the spotlight. This traditional back-office destination is expected to garner more interests in the coming years as the new Central-Wanchai Bypass will greatly enhance its accessibility to Central.
As revealed in the survey results, fringe-CBD (Sheung Wan, Wanchai and Causeway Bay) are the most popular relocation destinations in which 30% of the respondents consider it as the top choice. For instance, Lee Garden Three, a premium Grade A office building in Causeway Bay to be completed in Q3 2017, has secured pre-lease commitments from Maybank, Cathay United Bank and Bank SinoPac. With the majority of companies from the Banking and Finance sectors preferring to remain in Central, these companies serve as minority cases where location is regarded less important than rental consideration.
Wong Chuk Hang remains another viable option for cost-conscious tenants who wish to remain on the Island, the commissioning of the South Island Line. The area has so far witnessed some notable transactions, including AXA Insurance, Insurance Authority, HOK (architecture firm) and Valentino (luxury retail brand). With the vacancy declines so rapidly it is expected to see rental hikes in the area in the near future.
Alternative Office Solutions – the Emerging Real Estate Strategies
Occupiers in Hong Kong haven’t realised that their offices are generally between 40 – 50% underutilised. While only 13% of respondents have adopted the Activity-Based Working (ABW) and Agile Workplace approach, the low adoption rate can be explained by the fact that 69% of the survey respondents have little idea about the utilisation rate of their offices. Minimal adoption of activity-based working approach indicates a huge missed opportunity for occupiers to achieve cost savings, and there is a huge potential to increase workspace utilisation rate, especially for offices in the CBD area.
Flexible workspace including coworking space and serviced offices, meanwhile, provides a temporary swing-space under flexible lease terms for companies who are restacking their existing office space. Companies are beginning to accept and understand the values that flexible workspace providers bring in. Division or firms with a fluctuating headcount can access office space without any CAPEX requirement, as well as to have the opportunity to network and collaborate with other flexible workspace tenants.
As the Occupier Survey points out that the core-CBD will still be considered as the premier location for the Banking and Finance industries, they will be expecting more rental hikes in the coming years as a result of the influx of PRC companies into the area. Fortunately, alternative workplace solutions will offer excellent cost-saving opportunities for these companies to maintain a flat rental budget while increasing their headcounts at the same time.