In recent years, the difference in rental performance among Grade A office buildings in Shanghai has become more significant. We compared the deviation of each building’s rental growth from its submarket average growth rate, and saw an increasing trend of rental divergence in the Shanghai office market.
The two images above show the rental divergence of Grade A offices in 2016 and 2018. The height of each column represents the deviation of the buildings’ rental growth from submarket average rental growth. The red columns signifies projects with rental growth higher than submarket average, while the grey columns represents buildings with below average rental growth.
In 2016, while decentralised submarkets were still in the early age, the CBD area had already shown signs of rental divergence. In the CBD submarkets, several projects that faced the challenge of decentralisation lowered their rental expectations, while others still achieved large rental premium. However, the rental growth divergence in a same submarket remained quite limited, as these projects enjoyed similar transportation network and retail amenities.
In 2018, as CBD submarkets grew more mature, the deviation of CBD projects’ rental growth was much larger than in 2016. Large supply and decentralization had placed significant pressure on older projects in CBD, while well-maintained and newly completed premium grade A buildings still saw double-digit rental growth. In the last two years, 3.57 million sqm of new supply entered the Shanghai office market wherein two-thirds of this area was allocated beyond the CBD area. The high quality of new supply and easy accessibility of decentralised submarkets encouraged tenants in older CBD projects to move out. On the other hand, premium projects in the CBD outperformed the market. Trophy buildings in Nanjing W. Rd. submarket secured high-profile companies seeking an upgrade in requirements hence causing them to move from other older grade A projects nearby. Several well-performing projects in Lujiazui still kept high occupancy and high rent despite the large supply and vacancy pressure of submarkets. In the decentralised market, rental divergence also became more significant as several submarkets’ current stock have already reached a critical mass. Projects directly connected to metro stations can easily achieve high rental growth, while others may struggle in competition and have to lower rental expectations in order to secure high-quality tenants.
The wider rental gap among projects within the same submarket indicates a more complicated leasing environment. Looking ahead, we forecast the rental performance to continue to diverge, as challenges and opportunities coexist in current market conditions. With 1.7 million sqm of new supply in the pipeline and market uncertainty lingering, some landlords have adjusted their sentiments. However, we still see solid economic growth underpinning the Shanghai office market. The acceleration of financial opening-up policies, the sciences and technology innovation board, and the 2nd CIIE may all bring about more opportunities to relevant industries, and in turn, will transfer to office demands. In a rapidly changing environment of 2019, we suggest landlords to be more proactive and seize opportunities to stand out amidst challenges.
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