CHINA INSIGHTS

The Difficulty in Reversing

High Office Vacancy Rates in First-tier Cities

When it comes to office buildings in the Mainland, it’s believed that everyone is aware of the persistently high vacancy rate. Since the national economy and industry are still in the adjustment period, coupled with adequate supply, it is difficult for the market to reverse this high vacancy rate in the short term. In the first quarter of 2020, the average vacancy rate of first-tier cities could hover above 10%, while second-tier cities could approach 30%. It is expected that rents in most first-tier cities will still be under pressure in the first quarter, but the annual decline will be within 5%. It is worth mentioning that in 2019, the new office development area across the country changed from being negative to positive, indicating that developers are still actively exploring the office market in this severe economic environment. Whether the subsequent increase in supply will put pressure on selling prices and rents will very much depend on the speed of the office market adjustment and the progress of project construction.

For individual first-tier cities, Beijing's overall market will enter its second peak supply period in 2020. It is believed that the vacancy rate will deteriorate further and overall rent will continue to go on a downward trend. However, the Mainland's active opening up and deepening reforms will help shorten the overall market's destocking cycle. In Shanghai, as the market continues to digest the impacts of the Sino-us trade war, it is expected that the new absorption will see a strong rebound in 2020, supporting the overall rental performance. It is rather hard to absorb the doubling of new office supply; therefore, the overall vacancy rate is expected to reach a new high. The demand for office buildings in Guangzhou will continue to slow down in the first quarter, further expanding the bargaining space for rent. The peak supply period will be concentrated in the second half of 2020, mainly from Pazhou and the Financial City in Guangzhou. It is expected that the overall vacancy will continue to increase and it is estimated that demand will be mainly driven by the TMT sector during the year, followed by real estate and financial services sectors. Meanwhile, the rise in Shenzhen office vacancy in 2020 is indeed inevitable. This is due to the explosion of P2P companies during 2018-19, the subsequent impact of bond defaults, and the increased office supply from the Qianhai New District. In addition, office rents in the central area are expected to see a steady upward trend.