Sluggish Shanghai office market gives tenants chance to bargain on rents, with landlords keen to attract or retain clients

Sluggish Shanghai office market gives tenants chance to bargain on rents, with landlords keen to attract or retain clients

12 Jan Sluggish Shanghai office market gives tenants chance to bargain on rents, with landlords keen to attract or retain clients

Posted at 00:05h in Asia by

A weak office market in Shanghai is offering tenants the chance to strike lucrative leasing deals, allowing companies to save on rent amid a glut of new building supply and a slowing economy.
A rising vacancy rate has put pressure on landlords to cut rents to keep existing tenants or attract new clients, with some offering discounts of up to 50 per cent, according to property consultancy JLL. Vacancies in mainland China’s commercial and financial capital stood at 22.9 per cent at the end of 2023, an increase of 1.3 percentage points over September, JLL said.

In Puxi, a noncore business district west of the Huangpu River, for instance, the vacancy rate stood at 31.2 per cent in December, compared with 29.7 per cent three months earlier.

“A large number of tenants are inspecting different office buildings,” said Jacky Zhu, a senior director of office leasing advisory at JLL Shanghai.

“Some are chasing lucrative leasing deals to reduce [rental] costs, while others are sniffing out how big a discount they can ask landlords for when negotiating lease renewals.”

The weak office market follows a failure by Shanghai’s economy to live up to expectations amid lacklustre investment and sluggish consumer spending, after China’s exit from its stringent zero-Covid policies in the first quarter of 2023.

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Tang Yunyi, a researcher with the Shanghai Academy of Social Sciences, said during a media briefing on Wednesday that millions of privately owned businesses on the mainland will have to adjust their business strategies to survive the changing economic environment, because they are facing stiffer competition in the traditional manufacturing and services sectors.

“Many of the small companies have yet to recover from the pain they suffered from the pandemic,” she said, adding that Beijing’s relief package – including tax reductions and lower credit rates – might not be enough to bail out some of the troubled firms.

“New policies need to be enforced as soon as possible to spur private businesses,” Tang said.

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The city’s office market would be more volatile in the first half of 2024, with incentives to spur economic growth potentially triggering a recovery later this year, said JLL’s Zhu. As a result, landlords of ageing buildings and projects with high vacancies are willing to offer lower rents and more incentives to attract and retain tenants.

Average rents have also dropped sharply across the city due to an oversupply of office space. Last year, 1.58 million square metres (17 million sq ft) – a year-on-year increase of 87 per cent – of new grade-A office space hit the market.

As a result, at the end of 2023, rents on average declined 3 per cent from September to 7 yuan (99 US cents) per square metre per day. These rents were also 6.3 per cent lower than the end of 2022, JLL said.

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JLL said that retail leasing in the fourth quarter of 2023 turned out to be steady, a fresh sign of recovery in consumer vigour. Take-up of retail space in Shanghai during this three-month period reached 268,000 square metres, bringing the total for the full year to 730,700 square metres.

The average rents in prime areas remained flat at 46.6 yuan per square metre per day in December, which represented a 0.2 per cent decline from a year earlier.

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