Office vacancies in China’s biggest cities are at the highest in more than a decade even as the nation’s economy has largely swung back into action after the coronavirus outbreak.
Vacancy rates for prime office buildings in Shanghai climbed to 20% in the second quarter and 21% in the tech hub of Shenzhen, both the highest since at least the financial crisis in 2008, CBRE Group Inc. data show. Beijing’s 15.5% rate was the most since 2009.
China was the first country in the world to go into lockdown in the first quarter to arrest Covid-19’s spread. Harsh measures taken early on have allowed the nation to claim relative success and reopen many businesses. But a conservative stimulus approach, teamed with the fear of a second wave, has produced only a modest domestic recovery, making corporate tenants cautious.
“Tenants have generally become more conservative and the majority are choosing to put their expansion or relocation plans on hold,” said Michael Wu, an executive director of office services at Colliers International Group Inc. “We’re starting to see fierce competition on rent among landlords.”
Adding to the pressure on landlords was a government directive in May that state-owned firms grant three-month rent-free periods for some smaller companies. Private landlords were encouraged to do the same. While such measures averted wholesale office surrender, more tenants are still giving up their space before the lease expires, according to Cindy Cai, who oversees office leasing in Shanghai’s state-owned business zone, Caohejing Hi-Tech Park.
There’s also the issue of a supply glut in many big cities. Of 14 major hubs tracked by Jones Lang LaSalle Inc., rents slid for all in the three months ended June 30, a second consecutive quarter of declines for most.
Total office stock in Shenzhen is expected to surge by about 60% by 2023 from the end of 2019, and jump 44% in Shanghai, JLL estimates. That excess space will push rents down by almost 12% and 9.5% respectively this year, Colliers forecasts.
Although a Bloomberg survey of economists suggests China’s economy may expand 2% this year after a first-quarter slump, full-year growth will still be the lowest since the 1970s.
Uncertain demand will probably push vacancy rates in key centers even higher. In Shanghai, office-vacancy rates could soar to 30% in 2021 before finally coming down, Colliers estimates. In Shenzhen, meanwhile, expect almost one-third of all prime offices to be to empty by 2022.
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