‘Too many offices’ in the works

There will be an oversupply of office space in China in the coming three years, with second-tier cities being hit first, industry analysts said.

The supply of office space in second-tier cities will increase more than 350 percent from current levels within three years, a report by real estate consultancy DTZ, a division of UGL Ltd, showed onWednesday.

In some markets, such as Dalian, Changsha andXi’an, developers are demonstrating concern about an oversupply by putting up for sale nearly all of the future stock of office properties that are about to hit the market, according to DTZ.

This situation “will leave these office markets generally characterized by soft rents, declining absorption rates and persisting high levels of vacancy”, said Andrew Ness, head of research for northern Asia at DTZ.

But the looming wave of office supply may be less devastating than was originally feared, since 44 percent of expected completions within the three-year period are likely tobepostponed, according toNess.

“Although we forecast net absorption to continue to increase in the next four to five years on the back of new supply-driven demand and the expanding footprint of domestic occupiers, vacancy rates are expected to continue to rise at a fairly rapid clip as well,” said Ness.

Even taking into account the numerous anticipated delays in completions, new office supply in 2015 will continue to surpass net absorption, according to DTZ. “With only a few exceptions, China’s office markets will generally remain under downward pressure to consolidate in most markets, over the medium term at least,” said Ness.

Oversupply in the country’s top cities, including Beijing and Shanghai, will also develop over the coming years.

According to Cushman & Wakefield, the world’s largest privately held commercial real estate services company, the total office stock in Beijing is set to double over the next five years.

“Depending on how much of this gets absorbed for owner occupation, these new premises could cause a situation of oversupply and significantly increased vacancy rates,” said Jonathan Davis, managing director for China at Cushman & Wakefield.

With considerable supply entering the market from this year onwards, there will be as much as 1.44 million square meters of Grade A office space coming online in the next two years. At the same time, the market will put upward pressure on office leasing.