Surge of New Offices as 2.78M Sqm Added to China’s Downtowns

China’s major cities expect to add a record 2.78 million square metres of new office space in 2015, but the record is likely to be short-lived, as another 4.18 million square metres are predicted to come online in 2016, according to a report released this week.

In the report, “Top Trends to Watch in 2015,” US-based real estate consultancy Cushman & Wakefield foresees a surge of new building completions. The agency predicts that this new supply will trigger a race by developers to become the first to complete and lease out their buildings, and could result in some big companies changing addresses.

“Tenants will likely hold off on office relocations now and wait until new supply comes online in 2016, to examine their long-term occupancy requirements. There will be a flight-to-quality over the next several years as tenants upgrade from aging buildings that do not have the infrastructure to support their needs,” says Michael Stacy, Managing Director, Tenant Advisory Group, China.

Despite the record-breaking new supply, the privately held real estate advisory firm still expects growing demand from tenants to absorb much of the new supply in Beijing and Shanghai.

Jump in New Building Debuts in China’s Largest Markets

According to Cushman & Wakefield’s research, the new supply coming online this year in the central business districts of Shanghai, Beijing, Chengdu, Guangzhou and Shenzhen alone will reach 2.78 million square metres (30 million square feet).

The flood of new supply is comes in reaction to a number of factors, including ongoing investor interest in developing office assets in China, an ongoing shortage of space in Beijing and parts of Shanghai, and growing demand for grade-A office space from China’s growing domestic service sector.

Office Supply Cycle Swings Away From Shortages

With Beijing expected to add 1.3 million square metres and Shanghai another 1.39 million square metres between now and 2016, the office supply situation in China’s two biggest business centres is rapidly moving away from the space shortage that prevailed just a few years ago.

According to the agency’s figures, in 2011 Beijing had just a 2.7 percent vacancy rate for grade-A office space in prime locations, and 2012 showed only slight improvement with 3.8 percent of the top grade space available to renting.

In Shanghai, after no major new projects opened in the fourth quarter of 2014, the second tower of Hong Kong developer Sun Hung Kai’s International Commerce Centre (ICC) project on Central Huaihai Lu is expected to add 58,000 square metres of new space to any already soft market in the Puxi area when it opens in the first quarter of this year.

New Supply Comes Online Just as Economy Slows

Unfortunately for the developers of much of this new office space, their bright shining towers are coming to completion just as China’s economy enters one of its slowest periods in more than a decade.

Whereas China’s economy expanded by more than 10 percent as recently as 2010, the country struggled to reach its 7.3 percent growth target in 2014, and most analysts are projecting still slower growth for 2015.

This slowdown in growth, coupled with this year’s record-breaking supply of new offices and 150 percent more space on the way in 2016 could rapidly change the tone of the country’s office market. Any existing shortages of office space could quickly turn to surpluses, especially in peripheral areas and in second-tier cities.

Even in the big cities, large occupiers of office space office tenants could be offered some very attractive opportunities to relocate.

Still, Cushman & Wakefield remain positive about demand in Beijing and Shanghai, and even in Chengdu, predicting that these markets will have some of the sharpest rates of uptake of new office space during the new year.

According to the property agency, strong demand for grade A office space, along with continued growth of China’s service economy will help the market to absorb much of the new supply. In particular the report pointed to the country’s rapidly growing Internet sector as a potential user of new office space.