Grade-A office market weakens further under pandemic

Shanghai's Grade-A office market continued to perform weakly in the first quarter of 2020 as the COVID-19 outbreak further dampened already subdued leasing momentum.

Grade-A office rents across the city fell 1 percent from the last quarter of 2019 to around 7.8 yuan (US$1.1) per square meter per day for the three-month period ending March, while net take-up stayed at 69,500 square meters, on a par with the previous quarter but a drop of 49 percent from same period a year earlier, international property adviser Savills said in its latest quarterly market report.

"Demand primarily came from leases before the Chinese New Year and will likely remain soft through the second quarter of this year as more tenants chose to renew their current premises instead of relocating and decision-making period was lengthened as companies became more cautious in their leasing strategies amid increased uncertainties," said James Macdonald, head of research at Savills China. "Coworking, among others, is particularly affected by the pandemic while demand from certain sectors such as health-care, insurance, IT and logistics will be boosted in the long run."

With no new supply coming into the market in the first three months, the total Grade-A office stock in Shanghai remained at around 13.3 million square meters at the end of March. The average vacancy rate, meanwhile, shed 0.5 percentage points from a quarter earlier to 16.9 percent as demand focused on existing stock, according to Savills data.

And construction delays due to the pandemic also caused a readjustment in the full-year forecast for new supply. About 1.2 million square meters of new office space are expected to be launched in 2020, Savills said, which is down 35 percent from the previous forecast made at the end of last year.

A separate report released recently by JLL also found continuously declining rents during the first quarter of this year with prime located buildings showing more resilience than their decentralized counterparts.

Grade-A office rents in the city's CBD areas fell 0.9 percent quarter on quarter, versus an average drop of 2.4 percent recorded at decentralized office towers during the same period, according to JLL data.