High office vacancy rates trouble China

High office vacancy rates trouble China

China's economy has rebounded since the coronavirus outbreak eased, but office vacancies in major cities are at their highest since the global financial crisis in 2008, reaching an average of 15% in the first quarter of this year.

Prime office buildings in Shanghai and Shenzhen saw vacancy rates reach 20% and 21% respectively, while rates in Beijing climbed to 15.5%, according to CBRE Group.

China's initial lockdown during the pandemic left up to 7 million square metres of office space empty in the four tier one cities by the end of the first quarter, while rents have declined for six consecutive quarters.

Efforts to support businesses have pressured landlords. State-owned firms in May were called on to grant rent-free periods of up to three months for smaller enterprises. Private providers were encouraged to so the same.

As the pandemic spread globally, the decline in business confidence resulted in many companies, particularly multinationals, becoming more conservative and delaying expansion plans. Despite the support measures, many struggling tenants have given up their office space before their leases expired.

However, Covid-19 is not the only factor to blame. A supply glut has occurred with many new office spaces entering the rental market in key Chinese cities. For example, total office stock in Shenzhen is expected to surge 60% by 2023 from the end of last year, according to Jones Lang LaSalle.

The huge jump in supply is in line with larger efforts to strengthen the position of the southern tech hub of Shenzhen and the Greater Bay Area as a regional economic powerhouse. More than 500,000 sq m of grade A office space was added to Shenzhen last year, but tenants have only occupied around 100,000 sq m, according to Cushman & Wakefield.

Competition among landlords will become fierce in the near term, with rents down by almost 12% in Shenzhen and 9.5% in Shanghai, according to a forecast by Colliers.

In Shanghai, the fall in corporate rents has been compounded by the migration of tenants to non-core suburban areas, such as the up-and-coming Lujiazui and Huangpu districts, which have benefited from lower prices and the ongoing development of the city's metro system.

As countries deal with fallout from the pandemic and we see a resulting reconfiguration of city spaces, the oversupply of office space and downward slide in rental income look likely to continue.

Suwatchai Songwanich is an executive vice-president with Bangkok Bank. For more columns in this series please visit www.bangkokbank.com

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