New ways of working, more cautious corporate spending and a surge in new office supply are combining to transform Hong Kong's office landscape. Amid the record-high vacancy rates, landlords should reassess their leasing strategies and approach to space utilisation and asset management to maximise occupancy of their portfolios. Landlords of mature office buildings located in prime business districts maintain their current position, whereas owners of smaller buildings in less sought after locations should consider adopting a hub-centric approach to attract tenants within a specific industry ecosystem, according to CBRE Hong Kong’s latest research report “Vertical Urban Ecosystem: Reinvigorating Hong Kong's Office Buildings”.

Evolving office market landscape

The report notes that Hong Kong's office market is undergoing a significant transformation. Considering both vacancy in the secondary market and upcoming supply, overall vacancy is anticipated to remain at approximately 15 million sq. ft. by the end of this decade. Landlords face significant challenges in maintaining high occupancy rates.

Marcos Chan, Executive Director and Head of Research at CBRE Hong Kong, stated: "To alleviate the pressure resulting from 15 million square feet of vacant office space, we believe that the current market conditions demand a broader solution. Landlords should adopt a more diverse approach to filling their buildings, such as converting them into hub-centric ecosystems that support specific and evolving economic sectors. Landlords play a crucial role in cultivating industry ecosystems that promote collaboration among upstream and downstream businesses, which will, in turn, attract demand for office space. Additionally, tech features will be a significant differentiator for commercial buildings in the future."

Alternative uses of commercial buildings amid the next-generation growth drivers

CBRE's research identifies emerging sectors such as education, innovation and technology (I&T), healthcare and wellness, and creative and cultural industries as key drivers of growth in Hong Kong's economy due to demographic changes and supportive government policies. These sectors require a different type of office space, one that combines living, working, and social elements to foster collaboration and innovation.

The government anticipates a shortage of 180,000 workers across various sectors in the next five years, highlighting the need to recruit labor and tertiary students from overseas. Coupled with policy measures to attract high-calibre students and skilled professionals to Hong Kong, the demand for accommodation is expected to surge.

Ada Fung, Executive Director, Head of Advisory & Transaction Services, CBRE Hong Kong said: "With demand for buildings that combine living, working, and social elements continuing to grow, the trend of living and working under the same roof will likely become more common in the coming years. We recommend landlords to adopt a hub-based commercial buildings with accommodation provided within a specific industry ecosystem. This can create synergy among occupants, enhance management and collaboration, and ultimately increase occupancy rates "

The report highlights that the landlords may need to fully or partially convert buildings to include accommodation or other non-domestic uses within traditional commercial space to achieve a round-the-clock ecosystem in commercial buildings.

Investment potential

Transforming office buildings into ecosystems that support specific economic sectors typically does not require significant capital expenditure. However, converting a building for lodging services may necessitate a more substantial investment to comply with regulatory requirements, such as fire escapes and safety standards, natural lighting, and the provision of sewer and water lines.

Conversion is most suitable for buildings that struggle to maintain high occupancy, especially those located outside prominent commercial hubs. In general, buildings with smaller floorplates tend to yield higher efficiency when accommodation is considered.

CBRE estimates that 186 Grade A office buildings, containing 8.0 million sq. ft. of vacant space, could be suitable for conversion into accommodation. Assuming a 70% efficiency rate, converting one-third of the suitable space for accommodation while retaining the rest for hub-centric commercial purposes could yield a gross floor area of 3.8 million sq. ft., or 19,000 to 38,000 flats and rooms, respectively. In addition to the Grade A segment, there are opportunities in the Grade B office market, with about five million sq. ft. of vacant space available.

Reeves Yan, Executive Director, Head of Capital Markets, CBRE Hong Kong said: "We recommend that landlords of mature office buildings located in prime business districts maintain their current position, as competitive lease structures are generally robust enough to ensure high occupancy. In contrast, owners of smaller buildings in less desirable locations should consider adopting a hub-centric approach to attract tenants within a specific industry ecosystem.”