Office rents drop at faster rate in second quarter

Shanghai's Grade A office rents fell at a faster rate in the second quarter of this year despite a recovery in leasing activities, international real estate consultancies said in their latest reports.

Citywide, net effective rents in CBD areas fell 2.6 percent to 9.52 yuan (US$1.36) per square meter per day and those in decentralized locations dropped 3.8 percent to 5.91 yuan per square meter per day during the April-June period from the previous quarter, compared with retreats of 0.9 percent and 2.4 percent, respectively, registered in the first three months, according to JLL research released on Thursday.

"Rental declines accelerated as the impact from the COVID-19 outbreak fed through to the second quarter," said Stanley Jiang, head of landlord services, Shanghai Markets, JLL China. "However, office leasing picked up with the decentralized market seeing more vibrant activities as firms pursued conservative strategies for cost-saving purposes."

Net absorption, for instance, reached 86,000 square meters in decentralized areas in the second quarter, versus minus 2,600 square meters in CBD areas during the same period, according to JLL data.

A separate report released by CBRE showed that net absorption of Grade A offices totaled around 73,000 square meters in Shanghai during the second quarter, a surge of 259 percent from the previous three-month period.

Emerging areas including Qiantan and the Greater Hongqiao area, among others, witnessed particularly strong expansion and relocation demand from industries such as pharmaceuticals, life sciences and electronics, while demand from professional service companies, TMT (technology, media and telecommunications) firms and traditional financial service providers remained resilient in core areas.

"Net absorption is expected to climb further in the second half of this year as businesses return to normalcy, as the negative impact from the coronavirus outbreak continues to wane," said Ivy Lu, head of research, CBRE Eastern China. 

"A batch of government policies released over the past few months, including further improvement of business environment and a better utilization of foreign investment, will boost office-leasing demand from MNCs while the national strategy to integrate the development of the Yangtze River Delta region may also bring a new round of demand from domestic companies," Lu said. 

Looking forward, about one million square meters of new Grade A offices are scheduled to be rolled into the local market in the second half of this year, pushing therefore this year's total new supply up to some 1.18 million square meters. By the end of this year, rentals may fall 3 to 5 percent from 2019 and vacancy rate will climb further to between 23 and 24 percent from 19.9 percent as of the end of June, CBRE predicted.