Tuesday, November 1, 2022

Shanghai Office Rents Dip in Q3 as Lockdowns Linger

ITC Phase III T1

Tower One of ITC Phase III is adding 110,000 sqm of new supply

Office rents in Shanghai’s key business districts edged downwards in the third quarter as landlords become more flexible on pricing in a market struggling to recover from months of Covid lockdowns.

Occupiers leased 104,000 square metres (1.12 million square feet) more grade A space than they gave back in the July through September period, a marked improvement from a net gain of 30,200 square metres in the second quarter, according to a report from JLL.

JLL’s report points to rising leasing activity in emerging business hubs such as Qiantan and Xuhui Binjiang leading a nascent recovery, but issues remain, according to James Macdonald, head of research for Savills in China.

“The market remains challenging. While on an anecdotal basis we have started to see a rebound in activity this is not yet represented in the quarterly figures. Companies are still cautious about making big moves given slower economic growth and uncertainties. Landlords are proving more accommodative in negotiations,”  Mcdonald told Mingtiandi.

Lujiazui Slides

Despite landlords’ increased willingness to negotiate, leasing in Shanghai’s core business districts remains muted with tenants occupying 25,000 square metres less in locations like Nanjing West Road, Lujiazui and Huaihai Road by the end of the period than they had three months earlier.

James Macdonald, head of Savills research for China

This contraction in total occupancy was more than triple the shrinkage of 7,700 square metres recorded in the second quarter, according to JLL.

Average rents in Shanghai’s central business districts declined by 0.7 percent in the third quarter, compared with the previous three months, although Xujiahui in Xuhui district managed a 3.5 percent increase, due largely to the debut of leasing at the third phase of Sun Hung Kai Properties’ ITC project, according to a report from Knight Frank.

While core areas such as West Nanjing Road and Middle Huaihai Road remained stable, the vacancy rate in central Lujiazui rose 7.6 percentage points to 11.6 percent as some large tenants based in the financial district chose not to renew their leases, said Knight Frank. 

Countering that trend, Zhonghai Fund set up a new 3,500 square metre in Lujiazui and Haitong Futures took up 5,600 square metres in Lujiazui Century Financial Plaza along Century Avenue.

Tesla, Coach and More

Deals in new strategic sectors such as life sciences and electric vehicles supported leasing momentum in non-core areas, such as Qiantan, Xuhui Binjiang, and Houtan, according to JLL and Knight Frank. 

Daniel Yao JLL

Daniel Yao, Head of Research for JLL China

The biggest deal in the quarter was Zeekr Company Limited, a subsidiary of Geely Auto, agreeing to set up a 25,000 square metre office at Henderson Land’s Lumina Shanghai Phase II in Xuhui Binjiang, according to Knight Frank. 

Other major transactions included Tesla signing a lease for a 2,470 square metre office at SK Tower in the Houtan area, and Rich Healthcare taking a 7,700 square metre space in Lujiazui Group’s New Bund International Square in Qiantan. 

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Coach made the largest commitment by an international firm in the period, with the American fashion house relocating its office to two floors spanning 4,200 square metres in Suhe Centre, a newly completed tower developed by China Resources Land and ShunTak Group along Suzhou Creek in Jing An District. 

Non-core areas in Shanghai recorded a net gain of 129,000 square metres in space leased with rents on average falling by 1.3 percent from the previous quarter as landlords in some high vacancy submarkets provided incentives such as longer rent free periods, according to JLL. 

More popular submarkets showed a stronger recovery, with rents in Qiantan increasing 3.1 percent and rates in Xuhui Binjiang going up 2.4 percent in the period, according to Knight Frank.

Supply Growth Continues

While tenants began re-entering the market, the service sector revival proved insufficient to overcome an increase in new supply, as the overall vacancy rate for grade A offices citywide rose 0.1 percentage point since the end of June to reach 16.3 percent.

SH Office Q3 2022, C&W

Rents fell and vacancy rose in Q3 (Source: Cushman & Wakefield)

The average vacancy rate in core submarkets in Xuhui, Jing An, Huangpu and the Lujiazui area rose 0.6 percentage points to 10.2 percent, according to Cushman & Wakefield. 

Six grade A projects were completed in the period, bringing a total of 669,786 square metres of new supply to the market which was up 10 percent year-on-year, according to Knight Frank.

In Xuhui district, in addition to tower one of the third phase of SHKP’s ITC, Henderson’s Lumina Shanghai Phase I in Xuhui Binjiang added about 285,000 square metres of new supply in total.

The Suhe Bay area in the section of Jing An formerly known as Zhabei added 193,000 square metres of office space, with the completion of Suhe Centre, as well as Joy Center by GrandJoy Holdings Group.

New Bund International Square by Shanghai’s state-owned Lujiazui Group in Pudong’s Qiantan area was also completed in the period. 

A Gloomy Fourth Quarter

Analysts expect the market to remain subdued in the fourth quarter as China sticks to its zero Covid policy and consumption remains weak amid an economic slowdown. 

Shanghai recorded a surge in Covid-19 cases after the week-long National Day holiday, with mini lockdowns and stricter curbs implemented around the city.

Yardi Proptech Report 2022 Spreadsheet_In story

“Market conditions remain challenging though not just because of the zero Covid disruptions but the general slowdown in the economy and consumer sentiment which will continue to weigh on business decisions. The market is expected to remain subdued until there is greater clarity on the zero Covid policy and the resolution of the developer debt crisis,” said Savills’ Mcdonald.

Regina Yang, head of research & consultancy Shanghai & Beijing at Knight Frank echoed McDonald’s views, predicting that rents will continue to slide and vacancy may go even higher as new supply enters the market through the end of the year. The firm expects at least 2 million square metres of new projects to be completed in the next 12 months.

Cushman & Wakefield and JLL, however, sees emerging industries helping to absorb some of the new space.

“Lockdowns have had an impact. Having said this, the company culture in China still favors employees working (in) offices. This, coupled with demand from burgeoning business sectors, such as technology, life sciences and new energy vehicles, will drive further demand into 2023,” Shaun Brodie, head of business development services for East China at Cushman & Wakefield told Mingtiandi. 

“The expanding Grade A office footprint of new strategic industries like life science and advanced manufacturing may help speed the pace of recovery…As the demand recovers, rent in overall market is expected to stabilize in the following several quarters,” Daniel Yao, Head of Research for JLL China, told Mingtiandi.

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