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Offices in China’s biggest cities are emptier than they were during stringent Covid lockdowns in what analysts say is a sign of how the country’s economic slowdown has hurt business confidence.
In June at least a fifth of high-end office space was vacant in the tech hub of Shenzhen, according to data from three real estate agencies, while office vacancy rates in Beijing, Guangzhou and Shanghai are also higher than in June 2022. Overall, rents are at least a tenth lower than they were two years ago.
The rise of flexible working has made it hard for developers to fill office space in cities such as London and San Francisco but in Chinese cities, where far fewer people work from home, analysts say a slowing economy is at fault.
“The biggest challenge is still the significant reduction in market demand due to the weakening of China’s economic growth expectations,” said Lucia Leung, director, research & consultancy, Greater China at Knight Frank. Beijing has set a full-year economic growth target of about 5 per cent.
In Shenzhen, Colliers put its prime office vacancy rate at 27 per cent in June, up from 20 per cent in June of 2022. Monthly rental prices at premium offices in the southern China city are now about Rmb163 -$22 – per sq m, down 15 per cent year on year. This matches the trend seen by Knight Frank and JLL.
The three agencies have recorded similar vacancy rises in other cities. Shanghai had a vacancy rate of nearly 21 per cent for its high-end offices as of June, up from around 14 per cent in June two years ago, according to Knight Frank. Rental prices have slipped 13 per cent year on year, the firm’s data showed.
JLL puts manufacturing hub Guangzhou’s prime office vacancy at 21 per cent as of June, and 12 per cent for Beijing, up from about 16 and 10 per cent in 2022, respectively.
Companies are trying to reduce costs and this has “led them to be more prudent in their office leasing decisions”, Leung said, citing rental reductions in lease renewals.
This environment remains “challenging” in China, Leung added, with the overall vacancy rate expected to continue to rise this year and rents forecast to fall by about 8 to 10 per cent year on year.
Part of the problem is new supply, said John Lam, head of China property research at UBS. In Shanghai alone, almost 1.6mn sq m of new prime office space will be completed this year, according to Colliers. This is the highest level of new supply in the past five years, it said.
While foreign companies including many US law firms have downsized or vacated their offices in Shanghai or Beijing over the past two years, the office rental market is largely driven by domestic companies.
More Chinese companies are moving to cheaper office buildings, Lam said, while state-owned enterprises are also looking to cut costs.
One lawyer at a major Chinese law firm said that they recently cut half of their space in an office building in Beijing’s central business area due to “downsizing and cost-saving”.
Zhang, a leasing manager at an office building in Beijing’s Lido area, said some smaller clients “cannot hold on any longer”, and most tenants want to renegotiate the rent.
He said the prime office market environment is still “poor”. “Clients are downsizing,” added Zhang. “Those who used to occupy an entire floor might now use only half a floor, and those who had two continuous floors might also downsize.”
Hong Kong-based Hang Lung Properties’ office leasing revenue in mainland China fell 4 per cent year on year to Rmb556mn on “weakened demand” in the six months to the end of June. The vacancy level in its flagship office building in Shanghai jumped from 2 per cent in June last year to 12 per cent in June this year.
“There will be downward pressure ahead,” chief executive Weber Lo told reporters last month. “What we hope to do now is to be able to keep our existing tenants.”
Additional reporting by Tina Hu in Beijing
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