China’s office market indulges tenants amid soaring vacancies, looming supply glut
China’s office sector will remain a tenant’s market in 2024, forcing landlords to continue lowering rents through the year to spur demand, pressured by an economic downturn and new supplies, property analysts said. “Overall, we will see a prices-for-volume strategy as the key theme for China’s office market in 2024,” said Mi Yang, head of office research for JLL China told the Post.
The country’s office market has become renters-led over the past three years, despite the markets having recovered up to 65% of the drop experienced during the Covid-19 pandemic, Mi said.
Landlords will be forced to lower their rents to close tenancy deals, especially since the demand recovery was slow in the current economic environment, he said.
Meanwhile, more supplies are forthcoming over the next few years, which will further pressure rents, although the contractions will be less severe when compared with 2023, according to JLL’s Mi.
Property consultancy Cushman & Wakefield’s latest report issued on Dec 28, 2023, echoed Mi’s views. The agency said that there would be a peak in office supply in mainland China’s major cities in the next two years, with Beijing, Shanghai, Shenzhen, and Guangzhou each seeing aggregate new rental spaces ranging from 500,000 sq m to more than 1.22 million sq m in 2024.
It will “inevitably lead to an increase in office-project absorption pressure and a steady downward adjustment in rents”, the international
real estate service firm said. “Landlords will need to strengthen their market competitiveness to attract tenants.”
JLL’s Mi estimated that rents for Grade-A offices in Beijing will decline around 6% in 2024, to the lowest in 10 years, following an 8% drop in 2023. Other major cities might see Grade-A office rents declining by between 2% and 4% through 2024.
The estimation came following a gloomy and worse-than-expected performance by China’s major office markets in 2023, with JLL and Cushman reporting lower office rents and soaring vacancies, despite signs of a demand recovery.
Cushman data showed that the monthly rents for Grade-A offices in Beijing — the city with the highest prime-office rents among peers — were RMB297 ($56) per sq m on average in the fourth quarter, down 3.2% from the previous quarter, while JLL saw rents hit a 10-year low at RMB300 per sq m.
Meanwhile, other major cities including Shanghai, Guangzhou, and Shenzhen saw declines of between 0.7% and 3.7% in the fourth quarter compared with the previous quarter, according to Cushman.
“Office rents will not see a rise until at least mid-2025,” JLL’s Mi said. “But, it will provide good opportunities for those [medium and longterm] investors to come in at low levels.
“According to our observations, some multinational companies took relatively stable and conservative strategies in China in 2023. But for the year of 2024, we noticed that certain firms are considering doing more.”
JLL foresees a relatively active investment environment in the coming year, Mi said, adding that some multinational companies are seeking good assets in China.
New sources of demand include high growth industries such as the hi-tech manufacturing sector, Mi said, citing the case of a robotic arms firm in the biotech space which had rented a property measuring over 5,000 sq m in Beijing in the fourth quarter. He did not name the company.
Despite the busy pipeline, he expected the market to gradually digest this renewed wave of supplies.
Global real estate consultancy CBRE also gave a positive outlook for prime offices in major cities in China. The difference between rental yields on Grade-A offices in China’s tierone cities and domestic interest rates had also turned positive for the first time, according to a research note dated Dec 7, 2023.
“We suggested medium and long-term institutional investors focus on Grade-A offices that are situated in the core areas of tier-one cities,” said Sam Xie, CBRE China’s head of research.
China’s office rental yields have a low or even a negative correlation to more than 90% of major markets globally, Xie noted. This offers a great diversification opportunity for international investors.