China’s office vacancy surges amid economic downturn, surging supplies

Office buildings in China’s top cities see vacancy rate surging as demand is unable to keep up with surging supply, due to economic downturn, US-China trade tensions and the deleveraging campaign in the financial sector.

Vacancy rate for Grade A office space in Beijing climbed to 11.5 per cent in the first half of the year, the highest level in eight years, according to Colliers International, a global commercial real estate services and investment management firm. About 160,000 square meter new office space was offered in the first six months this year, bringing the total office space in the city to 8.32 million square meters, according to the report.

Average net absorption, which tracks the occupancy of office space, fell to around 96,000 square meters in the first half of the year, 69.3 per cent lower than the end of 2018 and down 69.9 per cent from a year earlier, according to the report. Growth of net absorption of co-working space, which surged last year, also stalled this year.

DTZ, another global property services company, said that average vacancy in Beijing’s five central business districts rose to 5.6 per cent and the average for the whole city rose to 8.9 per cent in the second quarter of the year as new supplies hit the market and some companies terminated leasing contracts early.

Another top-tier city Shanghai is facing a similar situation. According to Colliers International, office demand in the city dropped sharply in the first half of the year.

Average net absorption tumbled to 270,000 square meter, compared to 1.25 million square meters for the full year of 2018. The report expects the figure for the full year of 2019 to drop to 790,000 square meters, 36.8 per cent lower than 2018. That would bring the overall office vacancy in Shanghai to 22.3 per cent from 16 per cent last year.

In the next two years, due to surging supplies of office space, vacancy rate will climb further to 23.6 per cent and 24.1 per cent respectively before returning to growth in 2022, according to the report.

Since the second half of 2018, negative factors including financial deleveraging, trade tensions with the US and the economic slowdown etc. have started to impact the office market in Shanghai, said Jiang Peng, deputy research director at Colliers International.

In the second half of 2018, vacancy rate at Lujiazui was 15.9 per cent, but it climbed to 19 per cent in the first half of 2019, dragging lower average rents. Jiang explains that due to China’s deleveraging campaign in the financial sector, some financial companies terminate leasing contract early.

In the first six months of this years, average rents in Shanghai’s central business districts fell 2.2 per cent year-on-year and will decline 4.7 per cent for the full year of 2019 , said Jiang, adding that some developers have delayed plans to push new office projects.

Global real estate firm JLL said in a report that the overall office market in Shanghai continue to slow in the second quarter. Vacancy in the Pudong CBD in Shanghai rose to 13.1 per cent by the end of the second quarter, 11.3 percentage points higher than the low seen in the second quarter 2015, due to surging supplies in the past two years.

Data from CBRE also showed that vacancy rate in Shanghai climbed to 18 per cent in the first half of the year, the highest in nearly ten years.

Colliers International’s report showed that Grade-A office space in the city of Shenzhen also surged to 23 per cent in the first of the year from 13.6 per cent a year earlier.

China’s economic slowdown and surging supplies of office space both contributed to the trend, said China Academy of Social Sciences(CASS), a leading state think tank, said in an earlier report. By the end of 2019, 17 cities tracked by the CASS are expected to see vacancy rate rise above 20 per cent.

Rising vacancy has brought down average rent level, which declined to 339.8 yuan a square meter per month, 0.6 per cent lower than the end f 2018, said the academy.