APPD Market Report Article
GuangzhouMay 31, 2022
Leasing demand recovers slowly in 1Q22
- In 1Q22, leasing demand was still affected by industrial regulative policies, and it was limited by the occasional flare-ups of COVID-19 across the nation, as various industries were concerned about the short-term economic development and their own growth prospect. Furthermore, net absorption in 1Q22 mainly came from buildings in Pazhou which were completed in the last two years.
- During 1Q22, financial institutions and state-owned enterprises remained two major sources of rental demand. However, the overall leasing demand was relatively inactive, and it was observed that in Zhujiang New Town (ZJNT), some landlords faced difficulties in leasing contract renewals because of the high rents in this submarket.
Two Grade A office buildings enter the market in 1Q22
- Two Grade A office buildings, Xiaomi Building and its sub-tower were completed this quarter, with an office GFA of approximately 86,400 sqm in total. The total stock of Grade A office buildings in Guangzhou reached 7.3 million sqm by the end of 1Q22.
- Although consistent absorption of vacancy was observed in Pazhou, the new buildings still pushed up the overall vacancy rate by 0.6 percentage points q-o-q to around 13.6% in the quarter. ZJNT continued to experience vacancy increase as some significant tenants withdrew from existing leases mainly due to strategic realignment.
Decrease in market rent resulted from vacancy issues
- As vacancy in several ZJNT buildings increased after the departure of anchor tenants, landlords found it difficult to fill vacant space quickly as leasing demand remained inactive in 1Q22, and most potential tenants had lower affordability. Hence, landlords in ZJNT had to compress rents to boost vacancy take-up, and consequently, overall rents dropped by 0.9% q-o-q.
- Two large-bulk transactions took place in 1Q22, one of them involved the BCC Phase I, whereas the other involved the Xiaomi Building sub-tower. Additionally, some new projects in the Guangzhou International Financial Town (GZIFT) submarket gradually approach completion, and financial institutions that have significant self-use demand are showing great interest in them.
Outlook: COVID-19 flare-up to weigh on leasing demand
- It is expected that the recent COVID-19 flare-up in Guangzhou and other Chinese cities will likely slow economic growth and many companies may adopt cost-sensitive real estate strategies, creating a temporary obstacle to leasing activity in the short term.
- As the local government is reacting quickly to prevent COVID-19 from spreading, expansionary fiscal and monetary policies will continue to support the economy and may also keep financial institutions and state-owned enterprises active in the leasing market. However, companies that were significantly affected by recent the COVID-19 wave may need extra time to restore their confidence in the market.