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- Office vacancy rates in Beijing, Shanghai, Guangzhou and Shenzhen rose to 15 per cent on average in the first quarter
- Average office rents declined 2.5 per cent from the fourth quarter last year
Office rents continue to be battered by the Covid-19 pandemic, and vacancy rates are on the rise in mainland China. A record number of offices have been left empty in the country’s four largest commercial hubs, while rents have declined for six consecutive quarters.
Office vacancy rates in Beijing, Shanghai, Guangzhou and Shenzhen rose to 15 per cent on average – the highest level on record – in the first quarter, according to data from the China Real Estate Information Corporation (CRIC).
“The basic operations of most companies have not been affected, but some might suspend or delay their expansion plans … thus new [office space] supply in the market will not be digested [fast enough],” said Martin Wong, research and consultancy associate director for Greater China at real estate consultancy Knight Frank. The total new supply of office buildings in tier 1 cities amounted to 448,000 square metres in the first quarter, according to CRIC.
About 7 million square metres – about 12 times the total space in Shanghai Tower, mainland China’s highest building, and more than 18 times the total space in Shanghai World Financial Centre – of Grade A office space was lying empty in the four tier 1 cities by the end of the first quarter.
The increase in vacancy rate comes as China reported its first quarterly contraction in gross domestic product since records began, amid the pandemic. Its GDP fell 6.8 per cent in the first quarter, with industrial production and the services industry the hardest hit.
As a result, in the January to March period, vacancy rates for Grade A office buildings in Shenzhen and Shanghai rose to 22.3 per cent and 21.1 per cent, respectively. In Beijing, 12.6 per cent of office space was unoccupied, while Guangzhou was more resilient, with only 4.8 per cent of its offices vacant.
And the difficulties Chinese companies are facing are being compounded as the pandemic spreads beyond their national markets. The International Monetary Fund recently forecast that global GDP growth would drop by 3 per cent this year.
“The coronavirus has become a global problem in recent months,” Wong said, adding that multinational companies had slowed their operations and expansion plans. Office real estate in Chinese cities that had a higher proportion of multinational firms, such as Shanghai, will recover slower than other cities, as a result, he said.
The Four Seasons Hotels and Resorts announced this month to cease operating its Shanghai hotel and residences from May 15. Starbucks said it had decided to halt new shop openings in China, with some postponed until the next financial year. Luxury brand Kering, which owns Gucci, Saint Laurent and Balenciaga, has also suspended plans for new openings in China.
Vacancy rates are expected to rise further this year, the analysts said, with new supply of offices in cities such as Shenzhen, Beijing and Shanghai coming online. A sluggish economic outlook is also likely to continue to weigh on growth. According to Knight Frank, the vacancy rates in Shenzhen and Beijing will be maintained at a high level for the rest of this year, at 20 per cent and 15 per cent, respectively. In Shanghai and Guangzhou, these rates will rise slightly, in the single digits.
“Some companies’ decision to delay plans to enter the market due to the coronavirus will bring no little pressure on the market to cut inventory. The decline of vacancy rates needs the long-term and stable development of all industries,” said Chen Peng, office building market manager at CRIC.
Meanwhile, the average office rent in Beijing, Shanghai, Guangzhou and Shenzhen declined 2.5 per cent from the fourth quarter last year, higher than an average decline of 2.1 per cent in the previous five quarters.
“The coronavirus has worsened the existing lack of demand,” Chen said. “Most cities have turned into a tenants’ market, as the pandemic has accelerated the bargaining stalemate between tenants and landlords.”
Rents in tier 1 cities will maintain a downward trend in the short-run, Chen said. “Resilient markets, where the tenant structure is reasonable and companies’ ability to survive risks is strong, will see rents stabilise or even rise. In the medium to long term, rents will become stable after a new equilibrium point is reached between tenants and landlords.”
Average rent in 15 major cities declined 0.8 per cent in the first quarter to 4.9 yuan per square metre, according to Beijing-based real estate research institute China Index Academy, especially in the retail, hospitality, transport and logistics, culture and entertainment sectors, which bore the brunt of Covid-19.
For instance, the average rent at Haikou World Trade Centre in Haikou, the capital of China’s southern Hainan province, declined 2.44 per cent in the first quarter, the China Index Academy said. Meanwhile, office rents in Nanchang Honggutan District’s commercial area in Nanchang, the capital of China’s eastern Jiangxi province, and Shanghai’s North Bund Area dropped between 2 per cent and 2.5 per cent.
The average rent in Beijing, Shanghai and Shenzhen fell to a three-year low in the first quarter, while it remained relatively stable in Guangzhou, where prices are lower and there is a balance between supply and demand, according to CRIC.
“Rents in commercial areas where emerging businesses are concentrated are relatively stable,” said Huang Yu, deputy head of China Index Academy. Although work and production has not fully resumed nationwide, technology and health care companies are expanding and renting more office buildings, while companies in finance and the technology, media and telecoms (TMT) sector are expanding, emerging as a major driver of growth in the market, she said.
Rents in tier 1 cities are expected to decline 3 per cent to 5 per cent, Knight Frank’s Wong added. “The outlook for the office building segment will depend on whether the government will issue more macroeconomic policies [to buoy companies] … as the office building market is usually correlated with the overall policy environment,” he said. “The central bank previously lowered the required reserve ratio, which did boosted confidence among companies.”
