Office market extends strength in Q1 but pandemic challenges grow

Shanghai's Grade A office market extended its strength in the first quarter of this year but faces short-term challenges from the recent resurgence of the COVID-19 outbreak, international property consultancy JLL said in its latest quarterly review released on Thursday.

Around the city, net absorption, a barometer of market demand for office space, was 295,100 square meters, with decentralized areas accounting for 251,700 square meters and the rest in CBD markets.

"Demand for office leasing in Shanghai continued to be strong in January and February," said Anny Zhang, managing director for JLL East China and head of office leasing advisory for JLL China. "It was fuelled by a range of companies, including manufacturing and trading and life science firms, along with finance and professional services providers."

Rents in both CBD and decentralized areas climbed during the three-month period as the market kept regaining momentum until the resurgence of the pandemic.

In Puxi CBD, rents rose 2.4 percent from the previous quarter amid strong sentiment among landlords, and in Pudong CBD, rents gained 2 percent quarter on quarter as the recovery improved and older buildings registered active leasing.

In the decentralized market, multiple submarkets saw recoveries in performance, leading rents to rise 2.5 percent over the last quarter of 2021.

And declining vacancy rates were also registered in both CBD and decentralized areas, the JLL data showed.

With no new projects reaching completion in CBD areas on both sides of the Huangpu River, the vacancy rate dipped 0.2 percentage points in Puxi to 5.8 percent and 1 percentage point to 8.9 percent in Pudong.

In decentralized areas, where new completions totalled 233,200 square meters in the first three months, the vacancy rate still fell 1 percentage point to 23.9 percent amid strong leasing and inquiries in a portion of the new projects.

"Looking ahead, we expect a short-term decrease in leasing demand caused by the pandemic, with rents also likely to face downward pressure," said Joseph Wang, head of JLL Shanghai's Pudong office leasing advisory.

A separate report released earlier this week by CBRE also forecast rent adjustments by landlords to cope with subdued leasing activities caused by the COVID resurgence.