Grade A office rents in Shanghai continued their downward slide in the fourth quarter of 2019 as the citywide vacancy rate hit 20 percent, according to a report published by Cushman & Wakefield this week.
Amid a glut of space caused by a surge of new supply in the city’s outlying areas, Shanghai’s supply of empty office floors has risen to its highest level in a decade, the property services firm said.
With the mainland commercial hub’s count of empty office space standing at approximately 2.5 million square metres (27 million square feet) at the end of December, rents fell for the fifth consecutive quarter during the last three months of the year, according to a separate report released by Knight Frank this month.
Falling Rents as Tenants Look to Suburbs
Rental rates have continued to slide in core areas such as Lujiazui and Huangpu district in the face of pressure from cheaper rentals in suburban areas, which are becoming more attractive to tenants as the markets in non-core districts mature, according to Cushman & Wakefield.
The property services firm said that it expects rents to continue to slide this year, as tenants look to set up in the suburbs where the average rental rate of RMB 202.4 ($29) per square metre per month in the fourth quarter was 32 percent cheaper than in core areas.
Benefiting from these lower rents as well as the development of the city’s metro system, which has made the suburbs more appealing, Swiss data management firm Evaluserve relocated to suburban Minhang in the fourth quarter, taking up 2,500 square metres of space in Blackstone’s Westlink property, which the fund manager purchased in 2018 for $1.25 billion.
As this migration to Shanghai’s outer regions continues, core area rents in the city of 26 million people fell to RMB 299.8 per square metre per month from October to December, a 5 percent drop from the RMB 315.3 recorded in the same period last year.
Lujiazui, which has traditionally been the most sought after of Shanghai’s core submarkets, saw average rents fall to RMB 341.9 in the fourth quarter, a 10 percent drop from the same period last year, while vacancy increased to 17.8 percent from 14.9 percent over the same period.
As the suburbs gain traction, Shanghai’s priciest areas are getting emptier. The core area vacancy rate increased to 13.6 percent in the fourth quarter, up from 11.8 percent for the same period in 2018.
Shanghai Office Space to Climb 47% in 3 Years
But vacancy in the suburbs is also climbing amid an oversupply of new offices. Vacancy hit 30 percent for the three months between October and December, up from 24 percent for the same quarter the year before.
Shanghai has added one million square metres of office space in twelve months, increasing its total stock by almost 9 percent to 12.5 million square metres, and the growth in supply is set to continue.
According to Cushman & Wakefield, developers will add a further 5.9 million square metres of new office space over the next three years, which will grow the city’s office supply by 47 percent from current levels, with 70.5 percent of that total going to the city’s already generously stocked suburban office market.
During the fourth quarter, five projects opened in Shanghai, including part of Brookfield’s One East in Shanghai’s South Bund area, adding a combined 382,139 square metres of fresh grade A office space to the city during the fourth quarter.
The opening of three new towers at One East – which the asset manager purchased eight months ago for RMB 10.57 billion when it was still known as the Greenland Huangpu Centre – brought an additional 120,000 square metres of fresh space to Huangpu district, driving up the area’s vacancy to 17.1 percent.
Rising Vacancy as New Space Added to the City
Cushman & Wakefield noted that, despite rising vacancy, demand was “robust” in the city with an overall net absorption of 173,709 square metres in the fourth quarter, however, this new leasing was equal to just 45 percent of the 382,000 square metres of new supply added over the same period.
In Lujiazui, Bank of America Merrill Lynch took up 6,000 square metres of space in Sun Hung Kai’s Two IFC, relocating from the Azia Centre just 700 metres away along the Lujiazui Ring Road.
With current market rents for the financial district at RMB 341.9 per square metre per month, the US bank could be paying around RMB 2 million in monthly rent for its new premises.
Also during the quarter, US media company Omnicom renewed its lease of 8,000 square metres in the Eco City building at 1788 West Nanjing Road next to Jing’An Temple.
Although financial details of the lease have not been disclosed, the average market rent for Jing’an – where average vacancy climbed above 10 percent in the fourth quarter – stood at RMB 356.1 per square metre per month for the same period.