Grade A office market strong in long term

Industry experts are upbeat about Shanghai's Grade A office market despite some short-term pressure on rates and occupancy.

"In the short run, the city's Grade A office market is seeing abundant new supply coupled with softening demand as uncertain economic prospects have made some companies adopt a more cautious approach," said Daniel Yao, head of research at JLL China. 

"However, a batch of government initiatives, including the opening up of the financial sector, technological innovation, tax cuts and fee reductions, the expansion of the China (Shanghai) Pilot Free Trade Zone and the launch of the STAR Market, will definitely give a solid boost to the office leasing demand in Shanghai in the long term."

Grade A office rents in the Pudong CBD fell 3.6 percent to 10.7 yuan (US$1.27) per square meter per day in the second quarter of 2019 while vacancies rose to 13.1 percent, about 11.3 percentage points above the lowest level in recent years (the second quarter of 2015), after two years of large supply.

In Puxi, meanwhile, rents in the core CBD area managed to hold up, remaining almost unchanged from a quarter ago at 9.7 yuan per square meter per day, primarily due to limited supply and stable demand, according to JLL's latest data.

Vicky Shen, head of office services for the China operation at Cushman & Wakefield, also held an overall optimistic outlook toward the city's office leasing market.

She said it is currently going through some normal and moderate corrections in some areas such as the Lujiazui CBD.

"Our data showed that the average vacancy in Lujiazui  stood at around 16.4 percent in the second quarter of this year, the highest among all core CBD areas in the city and a decrease of 1.8 percentage points from the previous three-month period," Shen said. 

"It is pretty normal for companies to move in and out for various reasons but Lujiazui still remains one of the most sought-after addresses for corporate tenants especially from the financial industry."

Cost-reduction concerns, abundant high-quality office supply in emerging areas, and upgrade demands from companies which have been in old Lujiazui buildings are cited as the three major reasons behind tenants relocating. 

At the same time,  office expansion and high-profile image demonstration, as well as continuously robust demand from financial and legal firms, keeps luring tenants to Lujiazui, Shen said.

For the next five years, new supply of Grade A offices will likely reach 5.7 million square meters in Shanghai, with some 1.6 million square meters in core CBDs and the remaining 4.1 million square meters in emerging areas, according to an earlier forecast by Cushman & Wakefield.