In a recent field research trip to Wuhan, where I spent many hours with our local team on site visits and in-depth discussions with various real estate market players, I came away with the impression that there remains considerable pent-up demand in the Grade A office sector despite what headline numbers suggest. With a vacancy rate of 25% as at end-2013, one would think that there is ample slack in the market that would undermine landlords’ pricing power. But anecdotal market evidence suggests otherwise:

• Corporate Centre No.5 in Wuhan Tiandi is located some distance away from the CBD’s centre of gravity. Yet it is practically fully occupied with good tenants and commands the highest rent in the city.
• Guangdong Development Bank Tower in the heart of the CBD arrived in the market in 4Q 2013. Within a quarter of its launch, strong take-up velocity pushed the occupancy rate from 20% to almost 70% now, even as the landlord continues to increase its asking rents.
• Despite being located in Wuchang District, Wuhan Wanda Centre has successfully attracted reputable firms and MNCs from across the river and has now stabilized at a high occupancy rate.

The reason for the seemingly high vacancy rate can be attributed to a few buildings that have been included in our Grade A basket – they meet our quality standards – but are suffering low occupancy levels for unique reasons. One of the buildings with about 30,000 sqm of vacant space, we learned from the leasing agents, has a landlord that has not been pushing it to the market. Another building which is less than 40% occupied has priced itself out of the market by asking for rents that are 35% higher than a neighbouring comparable building.

As unscientific as it seems, anecdotal evidences such as these reveal important insights into emerging markets where sample sizes are small and constitute an important part of bottom-up research. By removing the few buildings that are experiencing low occupancy rates due to unique non-commercial reasons, a more representative Grade A occupancy rate would be in the region of 90%. Coupled with steadily increasing rents since 2009, it becomes clearer that some demand for Grade A office space in Wuhan remains under-served by the current limited stock of high quality office space.

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