Epidemic seen adding further strain to China's office market

China's Grade A office market will come under further pressure from declining rents and rising vacancy rates, at least in the near term, while the ongoing COVID-19 outbreak exacerbates a slowdown in leasing activities, analysts predict.

"As the Grade A office market in major cities in China was already under downward pressure before the coronavirus disease outbreak, which has been plagued mainly by subdued demand and ample new supply, rentals are expected to drop further for the duration of the outbreak and it would therefore take longer for the market to stabilize than previously anticipated," said Daniel Yao, head of research for JLL China. "On the supply side, project delays due to the virus outbreak might help alleviate competitive pressure in some sub-markets but overall softening demand would continue to weigh on the market in the near term."

An outlook report released on Wednesday by global property consultancy Cushman & Wakefield showed that gross effective rental growth for Grade A offices in Beijing, which is expected to see 2.3 million square meters of new supply arrive in the two-year period through 2021, would fall 5.9 percent this year and reverse to a mild rebound of 2.8 percent in 2021. In Shanghai, where some 5.9 million square meters of new Grade A offices are forecast to be added between 2020 and 2023, gross effective rental growth for Grade A offices might decrease 1.4 percent in 2020 and remain in negative territory for one more year though a rather insignificant year-on-year dip of 0.1 percent had been predicted.

"The COVID-19 outbreak has been an unprecedented event and its impact will be felt in Shanghai's office market into the near-term future," said Shaun Brodie, senior director of research at Cushman & Wakefield China. "Subsequent amplified vacancy is expected to place further strain on citywide rental."

In Beijing and Shanghai, the vacancy rates might climb to 18.4 percent and 22.9 percent, respectively, this year, up from 13.5 percent and 19.6 percent in 2019, Cushman & Wakefield data show.

Bucking an overall bleak scenario, there are still tenants and industries that are proving resilient to, or even thriving amid, near-term challenges. Notably, companies offering necessary services during times of crisis, including health-care and insurance providers as well as online entertainment sectors, will drive some office leasing demand in the immediate term. Such demand will probably continue expanding once the coronavirus outbreak is contained and supportive government policies lay the groundwork for economic recovery, according to JLL research.

The top three industries which are expected to drive office leasing demand into the rest of the year in Shanghai are likely to be health care, professional services and the technology, media, and telecom sector, according to the Cushman & Wakefield office outlook report.