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Shanghai Core Office Rents Fell 6.7% Last Year as Vacancy Climbs

2021/01/18 by Christopher Caillavet Leave a Comment

qiantan centre

Lujiazui Group’s recently completed Qiantan Center has been pulling tenants further south in Pudong (Image: Kohn Pedersen Fox)

Shanghai office rents ended 2020 as they began it — in a persistent decline — despite a boost from leasing activity in fringe areas, according to research by global property consultancy JLL.

Rents in Shanghai’s prime office locations fell 1.3 percent in the fourth quarter on a sequential basis and 6.7 percent year-on-year, as pressures from new supply pushed landlords to remain open to flexible terms and additional incentives, JLL said in its quarterly Office Overview report.

Knight Frank 390-396 Pitt St

Leasing rates in outlying areas, meanwhile, fell 0.9 percent from the third quarter and 9.3 percent from a year earlier, though rents in submarkets with strong momentum such as Pudong’s Qiantan area began to increase in the second half.

“Demand in the office market saw some rebound in the second half of the year, especially in certain decentralised submarkets that attracted many firms with cost-saving demand or large requirements for headquarters space,” Anny Zhang, managing director for JLL East China and head of markets for JLL China, said in a press release. “Continued improvement in regional planning and building quality, combined with competitive rents, provided many firms with opportunities to upgrade their office environments.”

Office Demand Recovers

As the negative impacts of the COVID-19 pandemic subsided, demand for office space in the megacity rose accordingly, JLL said. Overall net absorption reached 214,000 square metres (2,303,477 square feet) in the fourth quarter of 2020 and 407,000 square metres for the full year.

anny zhang jll

Anny Zhang takes charge of JLL East China

For the year, projects outside of the core districts accounted for 397,000 square metres, or 98 percent, of space leased, with pre-leasing at Lujiazui Group’s 56-storey Qiantan Center among the major draws for international corporates. Leasing in prime office locations also recovered in the fourth quarter, with net absorption climbing to 25,000 square metres from 6,200 square metres in the third quarter and -2,600 square metres in the second quarter.

“Domestic financial services and professional services companies took advantage of rental declines to upgrade their CBD offices from Grade B to Grade A,” said Neo Huang, senior director of markets for JLL Shanghai.

Three new projects added 137,000 square metres to the Shanghai office market in the fourth quarter, led by Hengsheng Real Estate’s Shanghai Bay development in Xuhui district’s West Bund. New supply for the full year reached 891,000 square metres as construction resumed after pandemic-related delays.

Fourth-quarter office vacancy in core districts reached 12 percent, up 0.2 percentage points from the previous three months and up 2 percentage points from a year earlier, mainly due to new supply in the Changning submarket. Non-CBD vacancy in the fourth quarter eased to 29.6 percent after peaking at 31 percent in the third quarter, with fresh demand driven by cost savings.

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Non-CBD rents averaged RMB 5.70 ($0.88) per square metre per day in the fourth quarter, compared with RMB 9.20 in Puxi and RMB 9.40 in Pudong.

Investment Deals Fall 28%

With companies leasing less space, and COVID-19 keeping borders shut, investors were also buying fewer buildings in China’s commercial capital last year. Investment transactions of commercial real estate in Shanghai for the 12-month period fell for the first time in five years, sinking 28 percent to RMB 76.5 billion compared with 2019, JLL said.

Foreign investors’ share of transaction volume in the city fell from 45 percent in 2019 to 16 percent in 2020, with local corporates picking up some of the slack as they acquired new space for their teams. Self-use demand accounted for 67 percent of Shanghai’s transaction volume in 2020.

Purchasers of self-use space helped the office market remain the most popular sector for investment, even as leasing remained under supply pressure. The office sector’s share of overall transaction volume reached 82 percent in 2020, up from 59 percent in 2019.

“Looking ahead to 2021, we expect that the investment market’s recovery will depend on the strength of the economic rebound and stabilisation in rental levels,” said Jim Yip, head of capital markets for JLL East China. “Investors will be more selective in pursuing office sector assets as a result of cyclical pressure.”

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JLL expects office leasing demand in Shanghai to continue improving as long as COVID-19 remains under control and the economy recovers. On the other hand, the US-based firm expects that lingering effects of the pandemic will likely lead businesses to remain cost-sensitive, which combined with ample supply could make rents decline further in 2021.

The agency anticipates that as the market recovers, leasing demand will be driven by sectors that benefit from the pandemic or receive support from key policy initiatives, including TMT, financial services, healthcare and foreign financial firms.

Related Stories

  • Hong Kong Office Rents Could Fall 10% in 2021 After New Leases Slid 39% This YearHong Kong Office Rents Could Fall 10% in 2021 After New Leases Slid 39% This Year
  • Hong Kong Office Vacancy Rises for 13th Straight Month, Central Now 6% EmptyHong Kong Office Vacancy Rises for 13th Straight Month, Central Now 6% Empty
  • Hong Kong Tenants Hand Back Offices for 12th Straight MonthHong Kong Tenants Hand Back Offices for 12th Straight Month
  • Shanghai Office Rents Fell 3.7% in Q2 Despite Leasing UptickShanghai Office Rents Fell 3.7% in Q2 Despite Leasing Uptick

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Filed Under: Research & Policy Tagged With: China, Featured, JLL, office leasing, Shanghai, weekly-sp

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