City Grade A office rentals extend decline

Grade A office rentals in Shanghai extended their downward trajectory in the last quarter of 2020 amid ample new supply despite a slower rate as the negative impact from the COVID-19 pandemic continued to subside while demand picked up, global real estate consultancy JLL revealed in a report released on Tuesday.

Rents in CBD areas fell 1.3 percent quarter on quarter between October and December and decentralized rentals shed 0.9 percent, decelerating from the declines of 2.1 percent and 2.6 percent, respectively, registered in the third quarter of 2020.

Year on year, CBD rents retreated 6.7 percent while those in the decentralized market dropped 9.3 percent, JLL data showed.

“Demand in the office market started to rebound in the second half of last year, especially in certain decentralized submarkets that appeared to be attractive to firms seeking cost savings or large headquarters space," said Anny Zhang, managing director for JLL East China and head of markets for JLL China. "Continued improvement in regional planning and building quality, combined with competitive rents, provided many firms with opportunities to upgrade their offices."

Citywide, overall net absorption reached 214,000 square meters in the fourth quarter, bringing the yearly total to 407,000 square meters. Of that, 397,000 square meters were in the decentralized market.

On the supply side, three new projects added some 137,000 square meters to Shanghai's office market in the last three months of 2020, finishing the year with a total new supply of 891,000 square meters.

As a result, vacancy in CBD areas gained 2 percentage points year on year to stand at 12 percent by the fourth quarter while decentralized vacancy rates closed at 29.6 percent, 2.2 percentage points up from the end of 2019.

From the tenant perspective, domestic financial services and professional services companies took advantage of rental declines to upgrade their CBD offices from Grade B to Grade A, while TMT and health-care industries also remained active in 2020, according to Neo Huang, senior director of markets for JLL Shanghai.

Firms pursuing cost-saving opportunities will continue to be the key drivers of leasing demand and industries that benefited from the pandemic or are supported by key policy initiatives, including TMT, financial services, health care, and foreign financial companies, among others, should most likely lead the recovery of the Grade A office market, JLL predicted.