Hong Kong’s office landlords are facing the biggest crunch in a decade as rents slide and vacancy rates in the city’s notoriously pricey market reached the highest level in a decade.

About 1.1 million square feet (102,193 square metres) of space in Central business district would have been vacated by businesses by the end of last month, CBRE estimates. Imagine a totally empty HSBC headquarters, or two blocks of One IFC Tower. At 8.5 per cent, the vacancy rate is the highest since December 2009.

From Expedia to Macquarie Bank and the creator of the League of Legends mobile game, companies have trimmed their office demand as Hong Kong lurches from one political crisis to another, along with the impact of widening US-China trade differences.

“Some landlords have finally accepted the fact the sweet old days are over,” said James Mak, district sales director at Midland Commercial. “They are now willing to cut prices.”

While the sector is fast becoming a tenants’ market, more companies are still expected to bail on their leases, according to market data provider Savvi. On top of the vacancy in Central, they have surrendered 900,000 square feet across the city in the first five months of this year, triple the volume in all of 2019.

The Central business district itself could see a 30 per cent increase in surrender listings over the next three months, said Chris Cohen, an analyst at the Hong Kong-based real estate platform. Pressured by leases expiring this year and in 2021, landlords will have no choice but to cut rent sharply to retain them, he added.

Some 25,000 sq ft on the 31st floor of The Center, the world’s most expensive business address, are still on the market since online travel group Expedia began cutting back its operations at the start of the year. Landlords are now willing to consider HK$60 per sq ft for the lot that fetched HK$83 per sq ft in 2018, property agents said.

Riot Games, which develops the League of Legends mobile game, is seeking to sublease its space on the 53rd floor of the same building, said Scott Gelb, chief operating officer of the Tencent unit. Land Registry data indicates it has given up some of the space it signed up in 2019.

“We’re always evaluating space needs at all of our offices and have shifted plans such that we will not need to expand in Hong Kong for the time being,” Gelb told the South China Morning Post. “We will be maintaining our presence on the 51st floor.”

The Cheung Kong Center, owned by Li Ka-shing’s CK Asset Holdings, is still looking for takers for about 230,000 sq ft of space, months after they were vacated by its previous tenants. The size amounts to 10 of the 62 floors in the building. Five more floors will be added to the market when the Securities and Futures Commission moves out in August.

Yet, cheaper rents may not be enough to lure tenants, who themselves are battening down the hatches amid the city’s worst recession. Job losses this year have pushed the unemployment rate to near the highest in a decade, too.

At Henderson Land, total rental income across its portfolios – mainly in the office sector including the twin tower known as One International Finance Centre (IFC) – has declined by around 10 per cent in the most recent results.

“Some of our tenants in IFC office towers were considering reducing the size of their offices or ending their leases,” said Martin Lee Ka-shing, co-chairman of Henderson Land told shareholders on Monday. He was probably referring to Macquarie Bank, among them.

In hindsight, some landlords may have regretted not lowering rents fast enough last year to keep their tenants, as the pandemic worsened the market conditions.

“No one has a crystal ball,” said Paul Yien, senior director of Hong Kong markets at JLL. “They for sure did not expect that the hot market would be hit by the triple whammy of social movement, pandemic and the uncertainty surrounding the US-China relationship. Even with cheaper rents now, it is not easy to find new takers in a short span of time.”

For example, the entire 38th floor and some on the 39th floor in The Center are currently still empty after Goldman Sachs moved out at the end of 2018. In Causeway Bay, Hysan Development has so far failed to find new tenants for two of the five floors in Hysan Place to be vacated by KPMG in the coming weeks.

The pool of companies opening new offices or expanding in Hong Kong is quite small, market observers said. Mainland investors, who pushed the market to dizzying heights in 2008 with their acquisitions, are holding back.

Since anti-government protests broke out a year ago, many have stayed away after being targeted by violent protesters, thus depriving the market of its biggest and powerful benefactors.

The market is now pinning its hopes on Chinese technology companies, as more of them turned away from Wall Street to Hong Kong for stock listings, said Vincent Cheung, managing director of Vincorn Consulting. They include JD.com, NetEase and Baidu Inc.

“But a lot of them already have built a presence with international investors through their listings in the US,” he added. “They do not need an expensive address in Central to build up their image.”

It will get worse before it gets better, according to Midland Commercial’s Mak.

“Even buildings with big developer-landlords have seen rents plunging by 15 per cent from the peak in 2018,” he said. “Another 10 per cent discount will be offered by the end of this year as everyone is fighting to retain their existing clients.”