Cushman & Wakefield Report Says Get Out of China’s Downtowns

Apparently the centre cannot hold for China’s downtown office space, as one of the leading real estate advisors foresees things falling apart for tenants who don’t seriously consider locations away from prime downtown areas.

Real estate consultancy Cushman & Wakefield released a new report last week on China’s office market that recommends office tenants take a new look at commercial real estate outside of prime downtown areas.

The report, Office Decentralization in Mainland China: An Urban Conundrum, points to a combination of rising downtown rents, and the increasing desirability of decentralized office locations as reasons why 2013 may be the year that major occupiers make the break from the centre city.

Citing two recent cases that the consultancy has handled, helping Honeywell find a new location in an industrial park in Beijing, and assisting Nike’s move to Shanghai’s Yangpu district, the report points to a growing acceptance of non-downtown homes for major multinational corporations.

Sunny Zhang, Head of China Research of Cushman & Wakefield said:“There are four major incentives for office selection decentralization. The rise of rents in core submarkets is the primary force, also include factors from restricted corporate future expansion, optimization of back-up functions via relocation and employees’ needs for happiness.”

Major Multinationals Moving Away from the Centre

In the case of Honeywell, the US engineering giant relocated its Beijing office from the Eagle Run Plaza in the Liangmahe submarket to C&W Industrial Park in Jiuxianqiao submarket, located in the city’s northeast corner. The new office building spans nearly 15,000 square meters of office space and consolidates all Beijing employees into one space.

For Nike, the transition helped to integrate various office spaces into a single property. For this consolidation, Nike announced a long-term partnership with Tishman Speyer to strategically relocate its Greater China Headquarters to The Springs, a development located in northeast Shanghai, in a deal to be completed in the first quarter of 2014.

For the study, Cushman & Wakefield analyzed the office market in 20 cities across China and found that vacancy rates of the prime downtown markets in Beijing and Shanghai have continuously declined in the past three years. The study also documented that grade A buildings in non-core Shanghai submarkets are just around half the price of those in prime areas, while the price differential between downtown and decentralized areas in Beijing averages thirty percent.

The End of Financial Crisis Discounts

Part of the reason for the rapid increase in downtown rents in China’s tier one cities is the gradual expiration of the leases signed during the global financial crisis in 2008 and 2009. Since that interval, China’s economy has steadily recovered, and office rents picked up in tandem, surpassing even previous historic highs.

The Cushman & Wakefield study found that by the second quarter of 2013, office rents have increased by 43% in Shanghai and an astonishing 138% in Beijing since their low point in the second quarter of 2009.

And the price demands on companies renting in downtown Shanghai and Beijing are expected to continue.

According to the market survey, until 2016, total office supplies will be below 1.55 million square meters within Beijing core submarkets while supplies in emerging areas will climb to 3.6 million square meters. The total supply expected to be available within Shanghai’s prime submarket is estimated to be just 25.5% of the city’s total through 2016.

The full report is available here for those of you who want to know more about large office buildings in decentralized areas of first-tier cities of the world’s fastest growing large economy.