Hong Kong office fit-out cost growth decelerates in 2023
Multi-national companies seizing the opportunity to enhance office design
HONG KONG, 23 January 2024 – The average cost of designing and building workspaces in Hong Kong has increased by 2.3% to USD 133 per sq ft (about HKD 1,040 per sq ft), according to JLL’s Asia Pacific Fit-Out Cost Guide 2023/2024. The growth in fit-out costs has decelerated compared to the 8.3% increase recorded in 2022 due to the strong market competition.
The cost to fit-out workplaces in Asia Pacific continues to rise, mirroring ongoing inflationary pressures, higher commodity prices and increased construction costs. The average cost to fit-out workplaces across the Asia Pacific region increased 0.5% year-on-year with the average fit-out cost per sq ft rising to US$107.86, up from US$107.67 last year.
Hong Kong remains ranked ninth in the most expensive market in Asia Pacific for office fit-outs. Hong Kong remains a highly competitive market. An ongoing trend of margin compression has helped keep construction prices largely static last year.
Ryan Wong, Head of Project Development Services at JLL in Hong Kong, says: “The resumption of cross border traffic from mainland China has also eased pressure being exerted by increasing labour costs last year. Since the office rents have dropped significantly from the market peak and the fit-out costs are relatively stable in the current tenant favourable market, many multi-national companies are trying to seize the opportunity to move to quality office buildings that meet green specifications and enhance the office design to provide desirable working spaces for employees. The demand from top-tier luxury brands also increased after the sales in the city rebounded,”
“Looking forward, Hong Kong’s office leasing momentum is expected to remain soft this year due to ongoing geopolitical tensions and the global economic downturn. It would affect the demand for office design and construction. Meanwhile, with the recent approval of Supplementary Labour Scheme aiming to alleviate talent shortages, this will ease pressure currently being exerted by increasing labour costs. We believe fit-out costs to grow within 3% in 2024,” he adds.
After losing its spot to Sydney in last year’s guide, Tokyo has regained its place as the most expensive city in Asia Pacific for office fit-outs at US$192.4 per sq ft. Inflationary pressure is having an impact on project pipelines, but despite a 20% rise in construction prices at a local currency level, confidence remains in the market as the flight-to-quality remains a theme in Tokyo.
Australian markets follow Tokyo as the most expensive including Sydney (US$179.2 per sq ft), Canberra (US$178.9 per sq ft), Adelaide (US$176.2 per sq ft) and Melbourne (US$173.5 per sq ft). These markets continued to show increases in construction prices, but previous high levels of inflation have tailed off in line with projections.
Whilst overall construction prices at a regional level have shifted by 0.5% year-on-year in US$ terms, at a local currency level, most markets have reported increases. The exceptions are markets in mainland China and Vietnam, which saw largely static construction prices in response to weakened client confidence driving increased competition for work in these locations. Since abandoning the “zero Covid” strategy, mainland China has not experienced the sharp growth in pent up demand that was prevalent in other markets post pandemic.
Martin Hinge, Executive Managing Director, Project Development Services, JLL Asia Pacific, says, “Inflation in Asia Pacific markets is returning to normal levels as widely projected, but certain supply chain challenges remain for mechanical, engineering and plumbing, information technology and audio visual items. Going forward, we foresee factors like commodity process, energy costs, and wage increases will continue to impact pricing and lead to delays for some fit-outs and unpredictability of selection items into Asia Pacific. We have also seen significant exchange rate volatility over the last twelve months, in some cases eroding tender price increases in local currencies, leading to unpredictability on select imported items into Asia Pacific.
On the supply chain front, two-thirds of JLL’s Asia Pacific market leaders are citing constraints in mechanical and electrical (M&E), IT, audio visual (AV) and security trades. This is expected to continue improving over the coming 12 months as supply chains continue to adapt, and, in some markets demand softens.
Hinge adds, “Nonetheless, our clients continue to remain bullish. In most of markets, sentiment remains strong and despite the continuing impact of price inflation, our teams report robust pipelines due to a renewed focus by clients to attract staff back to the office, improve productivity and well-being, and meet net zero carbon (NZC) commitments.”
As the flight-to-quality trend continues there is a need to balance return to office mandates with the need to design and maintain hybrid, human-centric workspaces. Considerations include spaces that attract and retain talent, meet ESG aspirations, and provide environments that meet employees demands and the variety of work activities undertaken throughout the working day.
Sustainability remains front of mind
Leasing office space in sustainable buildings is becoming non-negotiable for occupiers committed to ESG. Among other factors, sustainable fit-outs are gaining prominence as an initiative to decarbonise workplaces. In a survey of 240 CRE leaders across Asia Pacific, one-in-two cite sustainable fit-outs as a priority to be actioned within the next three years. This confirms that sustainability is now a key driver in the way occupiers acquire, fit-out, and manage their assets.
While ESG commitments are a key driver of sustainable fit-outs, cost savings over the long term can offset upfront capital expenditure (CAPEX) costs. Sustainable materials or pieces of equipment may be more expensive upfront but those with better energy ratings or longer lifespans will save businesses money in the long-run.
Responding to inflationary pressures that projects are facing, one-third of JLL market leaders in Asia Pacific report that pursuing a sustainable design is dependent on the overall project cost and 56% also confirmed that reduced CAPEX on initiatives was being considered as a means to work within budgets, the bulk of which was in Australia and Southeast Asian markets.
For over 200 years, JLL (NYSE: JLL), a leading global commercial real estate and investment management company, has helped clients buy, build, occupy, manage and invest in a variety of commercial, industrial, hotel, residential and retail properties. A Fortune 500® company with annual revenue of $20.9 billion and operations in over 80 countries around the world, our more than 105,000 employees bring the power of a global platform combined with local expertise. Driven by our purpose to shape the future of real estate for a better world, we help our clients, people and communities SEE A BRIGHTER WAYSM. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.