An equity boom and other green shoots aren’t enough to lift a sector struggling with a supply glut and a retail market undergoing structural change
When predicting and assessing the shape of recoveries, analysts have made use of letters of the alphabet. A V-shaped recovery denotes a sharp rebound following a steep downturn. If the recovery takes a U-shape, however, both the trough of the downturn and the recovery last much longer. An L-shaped recovery signifies that activity never recovers meaningfully.
In Hong Kong, pinning a letter to the trajectory of an industry is easiest in the financial sector. The city’s equity market has staged a dramatic recovery over the past year, accentuating Hong Kong’s role as the primary conduit between Chinese and global finance. Share sales – which include initial public offerings (IPOs), primary placements and block trades – raised almost US$23 billion last quarter, the best quarter in over four years, according to Bloomberg.
Yet while the recovery in the territory’s capital markets is an emphatically V-shaped one, Hong Kong’s commercial real estate market remains mired in a deep downturn. That is not to say that there are no green shoots or pockets of resilience. “Buoyed by easing interest rates and a more stable macroeconomic outlook, activity across [the] office, retail, industrial and investment sectors is picking up, albeit unevenly,” a property agency said in a presentation on October 20.
In the office sector, net take-up in the third quarter reached 691,800 square feet (64,270 square metres), the highest quarterly total since the third quarter of 2018, data from the agency shows. In fact, all major submarkets recorded positive net absorption for the first time since the second quarter of 2015.
Another property agency said leasing demand from financial institutions and professional services firms has been given a fillip by Hong Kong’s hefty IPO pipeline and rising wealth management activity, benefiting premium office space in core locations.
Moreover, the peak of the supply boom – just over 7 million sq ft of Grade A space was added to the market between April 2022 and March 2025 – has almost passed. “New supply in 2026-28 will be just 60 per cent of the level in 2023-25, providing a space digestion period for the market,” an agent said.
The combination of the steep decline in Grade A rents between April 2019 and March 2025 and the surge in new supply has helped revive leasing activity, especially relocations and consolidations.
Retail sales, meanwhile, have risen on an annualised basis for four straight months as visitor arrivals in August reached 5.15 million, a post-pandemic monthly high. A property agency noted that Hong Kong’s cultural and entertainment sector has helped buoy demand.
Even in the city’s depressed commercial property investment market, the large number of sales involving financially stressed assets is helping spur transaction activity while the government’s prioritisation of post-secondary education is increasing demand for student hostels.
Taken together, these bright spots might suggest that the recovery in Hong Kong’s commercial property sector is likely to be U-shaped. Yet the scale of the imbalance between supply and demand in the office market and the acute cyclical and structural challenges facing the retail market point to a slow and protracted L-shaped recovery.
In the office market, while new supply between April 2022 and March 2025 was 2.3 times greater than in the preceding three-year period, total new leasing volumes increased by just 3 per cent. In fact, as much as 55 per cent of the stock completed in the three years to March 2025 still remains unleased, adding an extra 3.9 million sq ft to the amount of vacant space, data from the agency shows.
Simply put, the increase in net take-up this year has barely made a dent in the severe supply-demand imbalance. Even though vacancy pressure is concentrated in buildings with the lowest rents in decentralised areas, average Grade A rents are expected to continue to fall in 2025-26, with new supply pushing up the vacancy rate to a high of 19 per cent.
In the retail market, major changes in shopping habits and the eroding competitiveness of the sector explain why revenue in the retail and hospitality industries in the second quarter of this year was 10-20 per cent below 2018 levels, in stark contrast to the banking and asset management sectors where it was 40-80 per cent higher, according to Bank of America.
Shoppers flocking to the mainland to buy cheaper goods, coupled with growing competition from more sophisticated shopping centres across the border, have put Hong Kong’s retail property market under intense pressure.
Another property agent said “we should not be competing against Shenzen”. The territory’s advantages as a host of mega-events, which Bank of America believes could “unlock new opportunities for the tourism sector”, should be exploited more effectively. Yet labour shortages in the retail sector, reduced flight capacity and, crucially, an acute undersupply of hotels and rental accommodation have created bottlenecks.
Hong Kong’s commercial property investment market, moreover, is a shadow of its former self. The uncertain trajectory of interest rates, a persistent price expectations gap between buyers and sellers, and weak occupier fundamentals continue to crimp investment.
The good news is that Hong Kong’s commercial real estate market is showing signs of a recovery. “We’re finally seeing light at the end of the tunnel,” the agent said. The bad news is that the tunnel is a long one and the light is still quite faint.
