Overall leasing demand dampens lightly

• Leasing demand in Shenzhen in the quarter was mostly renewals or relocations at lease expiry, leading to a number of flight-to-quality relocations and upgrades. However, mid-lease-term expansions were rare, as most firms took extra caution with total operating costs.
• The TMT sector continued to provide dedicated support to leasing demand. Certain tech firms from selective streams with increasing R&D investment and higher emphasis on digital marketing required office expansion.

Citywide vacancy rates climb as a result of concentrated new supply

• Six new Grade A office projects entered the market, adding 380,000 sqm to the supply. Except for the headquarters of ByteDance in Houhai Bay, all others were mainly for leasing.
• Vacancy rates diverged across submarkets. Those of Nanshan and Bao’an Districts, where all the quarter’s supply is located, experienced noticeable increases, whereas those of submarkets without new supply mostly stabilised.

Rents stay on a downward trend

• With reduced activities in the leasing market and increasing supply, average rents in Shenzhen continued to fall. In addition, when negotiating with high-quality tenants, landlords offered lease incentives of various forms and more flexible lease terms.
• Furthermore, since market rents have been continuously declining, landlords have become more open to lease restructure negotiations with existing tenants before tenancy expires, to concede rents for stable occupancy.

Outlook: Policies might help ease office supply pressure to a certain extent

• In the next 12 months, there is expected to be over 1 million sqm of Grade A office supply. Meanwhile, the trend of tech and financial firms relocating to headquarters will further release high-quality offices to the leasing market, exacerbating supply-side competition.
• In response to recently released policies encouraging temporary usage of offices for livelihood purposes, at least 12 Shenzhen Grade A projects have now announced plans to partially convert to hotels. This might alleviate vacancy pressure in the office market.