Shanghai’s premium office and retail vacancy rates suggest ‘healthy’ growth, even if overall vacancies continue to rise

Supply is outdoing demand in the Shanghai market right now, JLL executive says
In Pudong’s central business district, the vacancy rate increased by just 0.8 percentage points to 11.5 per cent in the third quarter, while the vacancy rate of retail space in Shanghai’s prime market fell 1.7 percentage points to 11.7 per cent

China property

Daniel Renin Shanghai

Published: 6:00am, 13 Oct 2023

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Shanghai’s office vacancy rates have continued to rise, as corporate tenants tighten their purse strings and new supply comes online, and rents still heading down.

The overall vacancy rate hit 21.6 per cent at the end of last month, an increase of 1.2 percentage points from June, property services firm JLL said on Thursday. Rents, meanwhile, dropped 1.4 per cent to 7.2 yuan (99 US cents) per square metre per day.

A total of 341,000 square metres of new premium office space hit the market in the third quarter of 2023, increasing pressure on landlords to either retain existing tenants or attract new clients to bring the vacancy rate down.

“Supply is outdoing demand in the [Shanghai] market now,” said Stanley Jiang, head of project leasing at JLL Shanghai’s office leasing advisory division. “The weak office market gives companies opportunities to adjust their office rental strategies to save costs.”

The increase in office vacancy rates and decline in rents follows a 9.7 per cent expansion in Shanghai’s gross domestic product in the first half of this year. The first-half performance, however, seems lofty only because of a low base last year, when economic output in Shanghai suffered a huge setback thanks to a two-month citywide Covid-19 lockdown in April and May, which contracted its economy by 13.7 per cent in the second quarter.

“Thousands of businesses, from manufacturers to retailers, have yet to fully recover after China’s reopening [in January],” said Wang Feng, chairman of Shanghai-based financial services group Ye Lang Capital. “But some sectors, such as electric vehicles and technology, have shown strong potential to achieve high growth in the fourth quarter and the years to come.”

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China’s financial capital has set itself a full-year growth target of 5.5 per cent for 2023.

Property consultancy CBRE forecast in July that 953,000 square metres of new grade-A office space would be available in Shanghai in this year’s second half, nearly twice the 529,000 square metres of new space that came online during the first six months.

Most small businesses will, however, choose to reduce their investment in the face of dwindling consumer spending and an economic slowdown, hence curtailing demand for offices, said Zhou Qinggang, CEO of Chongming Kaixin Farm, which produces and markets agricultural products.

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“We would either relocate to some buildings that charge lower rents, or downsize our current offices to save thousands of yuan in rental costs,” he said.

“But we are still confident that business will turn around sometime next year and we will eventually expand our office space.”

Moreover, in the central business district of Shanghai’s Pudong, the vacancy rate increased by just 0.8 percentage points to 11.5 per cent in the third quarter, because no fresh supply of grade-A office space was added there, JLL said. The vacancy rate of retail space in Shanghai’s prime market fell 1.7 percentage points to 11.7 per cent in the third quarter, JLL added, a sign that the local economy is on a healthy track.

Ground floor rents in the city’s prime market increased 0.5 per cent to 46.6 yuan per square metre per day.

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