From Hong Kong to New York, a deep divide is opening up in office markets around the world, as tenants compete for space in prime buildings while other properties face falling rents, low occupancy and financing pressures.

The divergence reflects a global flight to quality, but also a disconnect between improving leasing fundamentals and a recovery in property values, according to analysts at Morgan Stanley and JLL.

The divide is being reinforced by limited new supply in prime locations, differences in how cities remove obsolete offices, and companies’ efforts to attract talent through better workplaces.

Tokyo has become the world’s most supply-constrained market with vacancy rates under 2 per cent, London leads Europe in inventory tightness, and New York City has achieved unprecedented top-tier rental rates, according to Julia Georgules, JLL’s head of research for leasing and capital markets.

Hong Kong and Manhattan illustrate the K-shaped recovery. In a report released earlier this month, Morgan Stanley said headline vacancy rates masked a growing divide in which location and building quality increasingly determine performance. Scarcity in prime business districts is supporting rents despite high interest rates, while weaker locations remain under pressure.

In Hong Kong, grade-A office vacancy in Central fell to 7.8 per cent in the third quarter as financial services and hedge funds fought over trophy assets, according to the US bank. Meanwhile, vacancy in less-fashionable districts such as Kowloon East was as high as 19.5 to 20 per cent, with rents continuing to decline.

Manhattan shows a similar disparity. Vacancy in prime submarkets such as Chelsea and Park Avenue stood at about 5 per cent, while the Financial District’s rate was 18.4 per cent, Morgan Stanley said.

The recovery in rents has yet to translate into a full recovery in property values. Gross office rents in Central had risen 7.3 per cent in the year to date, but Hong Kong grade-A office capital values remained about 50 per cent below their 2018 peak, the report said.

In Manhattan, class-A rents reached US$81.94 per square foot, up 4.3 per cent year on year, while leasing volume over the preceding 12 months reached 33.1 million square feet, broadly matching pre-pandemic annual averages.

Hong Kong’s sales market remains under pressure despite a rise in transactions. The city recorded about 293 office sales in the third quarter, up 25.8 per cent from a year earlier, while the value of those transactions was up 12.1 per cent year on year at HK$6.13 billion, according to Centaline Commercial.

Much of the activity involved developers’ new projects, while second-hand transactions remained weak, said Mark Chan, a director in the agency’s office division.

Some mortgage sales were being offered at discounts of 20 to 25 per cent compared with original purchase prices as lenders sought to recover cash, he said.

The ability to remove obsolete office space is another factor shaping the recovery. Manhattan’s office construction pipeline has fallen to 2.7 per cent of existing stock, from about 12 per cent in 2019, though office-to-residential conversions are helping remove older buildings from the commercial market.

Hong Kong, meanwhile, faces regulatory, planning and ownership hurdles that make large-scale conversions more difficult, leaving more existing office space competing for tenants.

“Hong Kong has historically had much less ability to remove grade-A office inventory this way,” Morgan Stanley said in its report, adding that rezoning could limit future commercial supply but completed offices largely remained offices.

Demand for quality is also being driven by competition for talent. Companies are increasingly treating offices as places for collaboration and productivity rather than simply as overhead costs.

In Manhattan, demand from technology companies, including AI businesses, has added another source of leasing activity alongside traditional financial services tenants.

“Globally, flight to quality has been the dominant narrative in the office market for the last few years,” said Georgules at JLL.

“While there remains obsolete office product across markets because it has aged and fallen out of favour from an occupier perspective, supply at the top of most global gateway markets continues to decline,” she said.