Demand for office space sluggish in 2019

Shanghai's Grade A office market continued to witness subdued performance in the last quarter of 2019 amid ample new supply and softening demand, according to latest industry data released by international real estate consultancies.

Across the city, Grade A office rents fell 0.8 percent quarter on quarter, or 5.6 percent year on year, to an average 8.63 yuan (US$1.24) per square meter a day at the end of the fourth quarter, global property adviser Cushman & Wakefield said in its latest quarterly report.

Average vacancy rate, meanwhile, climbed to 19.62 percent by the end of the year, an increase of 1.13 percentage points quarter on quarter and up 3.16 percentage points year on year.

"Abundant supply will continue to plague Shanghai's Grade A office market for another 12 months with about 2 million square meters of new space scheduled to be released to the local market in 2020," said Vicky Shen, head of office services for Cushman & Wakefield's China operation. "Correspondingly, landlords are trying various approaches to retain or attract tenants which mainly include lower rents, higher commissions, providing decoration subsidies and extra rent-free periods for new office fit-out."

A separate report released on Tuesday by the world's largest commercial real estate service provider CBRE showed that some 990,000 square meters of new office spaces were rolled out to the local market last year, while net take-up during the same period was just 296,000 square meters.

"Subdued leasing demand from tenants amid slower economic growth coupled with large amount of supply jointly contributed to rather lukewarm or worse-than-expected pre-lease activities recorded at most of the new office projects coming to the market last year," said Fion Zhang, head of office, advisory and transaction services at CBRE Eastern China. "Looking forward, however, with China's further opening-up in the service sector such as finance and TMT (technology, media and telecom), we remain upbeat to see growing demand from foreign companies to either set up offices or expand their current operations, which will then help the market to regain its strength."

Throughout 2019, finance, TMT, consumer goods manufacturing, professional services, and pharmaceutical and life science firms were the major sources of demand for Grade A office leasing in Shanghai, according to CBRE research.