looking beyond covid-19: china office demand – despite covid-19, demand continued to remain in positive territory
sep 29, 2020
shanghai, september 28, 2020 ——according to cushman & wakefield’s recent report, looking beyond covid-19: china office demand – despite covid-19, demand continued to remain in positive territory, during the past half-year, market uncertainty brought about by the global covid-19 epidemic has impacted grade a office demand in china.
shaun brodie, head of occupier research, greater china, cushman & wakefield, said: “in q2 2020, the total grade a office demand in the core markets of the 20 major cities in greater china that we track reached 47,624 sq m, amounting to a 90.2% decline compared to q2 2019. meanwhile, in terms of grade a core office market vacancy and following the same trend as at the beginning of the year, guangzhou and shenzhen recorded the lowest and highest vacancy rates among the four tier-1 cities, at 6.7% and 24.2%, respectively.”
affected by weakening leasing demand, the general rental performance across the grade a office core market within china’s four first-tier cities was consistently under pressure during the past six months. in q2 2020, beijing recorded the highest market rental among the first-tier city group at rmb 404.8 per sq m per month. registering rmb 191.1 per sq m per month, guangzhou recorded the lowest rental at the end of the second quarter.
the supply/demand rundown for 20 city core area-level markets in greater china (q2 2020)
source: cushman & wakefield research
beijing
the covid-19 outbreak in late january 2020 had a big impact on beijing. the hardest hit industries included transportation, logistics, tourism and entertainment. in q1 2020, leasing activity in beijing's office market essentially stalled during the home confinement period, with many enterprises postponing their decision-making processes. in all, stagnant economic activity, lease surrenders and space downsizing by tenants have brought great challenges to the beijing office market and as a result, citywide net absorption fell into negative territory, registering -36,782 sq m. this has marked a performance low not seen since 2014.
despite a subsequent covid-19 outbreak in beijing at the end of the q2, office leasing in the second quarter picked up. this trend was largely down to the registered pre-leased area in new completion office projects and delayed leasing transactions from q1. net absorption in q2, as a result, increased to 35,800 sq m citywide. however, when viewed as a whole, at -982 sq m (-21,881 sq m for the core area and -22,863 sq m for the suburban area), grade a office net absorption in beijing in h1 2020 still hovered within negative territory. consequently, overall market vacancy rose to 16.2%, a new high not seen since 2011.
although the covid-19 outbreak has had a negative impact on almost all aspects of the economy, growth opportunities in some industries are still prominent. in response to the impact of the covid-19 outbreak and to focus on future economic development, the chinese government launched a ‘new infrastructure’ investment initiative and has provided unprecedented policy support. within this investment initiative, 5g, artificial intelligence, data centres, the industrial internet and other high-tech fields are expected to serve as new driving forces for beijing’s economy. in the long run, with the further opening-up of the financial sector, the service sector and the support for ‘new infrastructure’ development, we remain optimistic towards the beijing office market.
shanghai
for the first six months of 2020, the grade a office market in shanghai recorded a net absorption figure of 25,719 sq m (-32,360 sq m for the core area and 58,079 sq m for the suburban area). given the impact of the covid-19 outbreak on economic activity, in q1 the net absorption total for the overall city was -90,454 sq m. however, as businesses got back to work and the economy began to pick up again, so did leasing demand, which registered 116,265 sq m of total net absorption by the end of q2.
although domestic enterprises continued to dominate the prime office leasing market, contributing to approximately 60.4% of all completed leasing deals by area, the share still decreased by 8.4% y-o-y due to the pandemic. meanwhile, as the pandemic in other parts of the world worsened after march, mnc leasing strategy continued to remain conservative with office demand from mncs accounting for a 39.6% share of deals by area in shanghai.
ahead, as the global covid-19 pandemic situation remains unclear, we expect leasing demand from mncs to continue to remain conservative, while domestic companies, as they revive their businesses more quickly, are likely to drive office demand in the city.
shenzhen
shenzhen welcomed a total of 439,657 sq m of new grade a office supply in h1 2020. net absorption amounted to 140,491 sq m for the first half of the year, surpassing the full year net absorption of 2019 and ranking first among the four first-tier cities in china. much of the take-up was supported by pent-up leasing demand being unleashed in q2, given the lockdown and market inactivity experienced in q1. meanwhile, q2 new supply did exert continued pressure on the market and as a consequence, citywide average rental dropped 8.1% when compared to the end of last year, finishing at rmb 7.33 per sq m per day at the end of h1. alongside the drop, further leasing opportunities have arisen for firms looking to relocate or expand.
domestic tenants accounted for 86.7% of the total office transactions in shenzhen by area in h1 2020. mnc tenants took the rest of the share.
given a prevailing cost-saving-measures stance taken by many companies in the current climate, we expect to see a steady flow of relocations, with companies moving from high rent offices to lower rent offices. the expected drop in rent may also stimulate expansion activity and hence support more grade a office absorption into the rest of this year and beyond.
guangzhou
amid the covid-19 outbreak, the grade a office market in guangzhou recorded a total net absorption figure of 19,721 sq m for h1 2020 (20,691 sq m for the core area and -970 sq m for the non-core area), accounting for only 31.8% of the total achieved for the same period last year. most of the leasing transaction cases in q1 were closed before the spring festival, allowing the net absorption total to remain relatively steady at 12,313 sq m when compared to the previous quarter. the impact of the epidemic on guangzhou’s grade a office market really kicked-in in q2.
although lumina guangzhou added 87,259 sq m of new supply to the market, total citywide net absorption in the second quarter only reached 7,408 sq m as some tenants downsized or surrendered leases.
in h1, domestic enterprises continued to dominate the prime office leasing market in guangzhou, contributing 68.4% of completed leasing deals by area. however, domestic leasing demand decreased 63.4% y-o-y due to the impact from the pandemic. benefiting from the growth in leasing demand from financial and manufacturing companies, mncs’ leasing demand in guangzhou accounted for 31.6% of transactions by area, higher than the previous high of 15.3% (over a five-year average).
the polarisation of the leasing market will continue into the coming months. companies that have benefited from the pandemic, such as insurance, software, gaming and healthcare companies, are expected to remain the main drivers of leasing demand in guangzhou. however, companies that have been hit hard by the epidemic, such as international trading, tourism and some traditional manufacturing, are expected to adopt a more cautious office leasing strategy.
jonathan wei, managing director, head of occupier services, china at cushman & wakefield, said: “looking to the near future, considering the covid-19 outbreak, policy direction and the current and expected macro-economic dynamics, we believe demand is likely to experience a further dampening in take-up, but there will be bright spots where office absorption has the potential to continue to drive some positive numbers. these bright spots are largely derived from industry sectors such as financial, healthcare, tmt, fmcg, online education and auto sectors, that have seen new business opportunities or have the potential to realise business growth, given the commercial, societal and lifestyle changes brought on by covid-19, as well as government policy directives.”
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