Office Rents Correlate with
Real Estate Analysis Limited
to recent media reports and real estate projections, the grade A office
market is expected to continue with its current robust state next year.
Indeed, some estimates show that rents could go up to the HK$200 per square
foot per month ranges. Music to the ears of office owners can also mean
headaches to office occupants.
No, your humble author would be IF this were not the case,
given the extended miniseries of quantitative easing episode 2, the allure
of the China and Asia economies, the historically low nominal interest
rates, the still lackluster markets in most Western countries, the
no-where-to-go-except-emerging-markets investors and investment managers,
and so on.
corporations move their (more of their) operations to Shanghai?
Probably, yet most would still keep a presence in Hong Kong and presence
could still mean half a dozen to over dozens of people.
some figures into the picture,
presence of 24 staff each occupying a net floor area of 125 ft2 including
reception, meeting rooms etc, this would still mean some 3000 ft2 which may
imply over 3600 ft2 in gross terms. No big deal but it is neither too minute
to smear at. Assuming one month¡¦s rent as the rental commission, $200 x 3000
ft2 = $600,000. Furthermore, rents may not be the determining factor with
regard to relocation, but the right staff.
Nonetheless, and notwithstanding Hong Kong having a vibrant economy and
being one of the popular investment regions, little good is done to the Hong
Kong grade A office market IF
such economic robustness does not translate into more employment (and
deployment ¡V from abroad) of staff and executives. A company which sees
growing business but does it without additional staff requires no extra
office space, and only when a company decides to expand its work team would
this lead to high occupancy rates and rents.
we have done simple correlations
of grade A office rentals from 3 districts (Central-Sheung Wan, Wanchai-Causeway
Bay, and Tsim Sha Tsui) and the unemployment rates of the FIRE industry
[Finance, Insurance, and Real Estate] to gauge if the two sets of data show
any significant relationship. FIRE is selected because they constitute a
sizable portion of grade A office occupants. The data spreads from 2008 to
present and comes mainly from related government departments such as Ratings
& Valuation, Census & Statistics etc:
Grade A offices at
Tsim Sha Tsui
Essentially, all grade A offices from the 3 districts demonstrate
significant (negative) correlations with the unemployment rates of FIRE.
This is only natural; the higher the unemployment rate, the lower the
rentals, and vice versa.
interesting is we have found that there is in general a 4-to-6 month lag in
between the occurrence of the lowest FIRE unemployment rate and the
appearance of the highest rentals i.e. the rentals reached their highest
levels after the lowest FIRE unemployment rate (or for that matter the
highest FIRE employment rate) showed up.
there is also a 2-to-6 month lag in 2009
between the highest FIRE unemployment rate and the lowest rentals. Perhaps
all these tend to illustrate that it takes time for occupants (corporations)
to react to the changing circumstances and to negotiate rentals.
As to what
the future may hold? Perhaps the following chart may give a hint or two:
it is obvious that when the FIRE unemployment rate goes up, rents trend
downward irrespective of districts or locations. On the contrary, when it
goes down, rentals tend to recover.
notwithstanding ups and downs, the FIRE unemployment rate has been declining
since early 2009 and rentals have been gaining some ground albeit in a
steady and slow manner overall.
the above trend to continue, grade A office occupants should allow for
increased rentals and expect a tougher time negotiating them.
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