APPD Market Report Article

Shenzhen

May 26, 2024

Silvia Zeng, Head of Research, South China

-8.8%

RMB 168

Rents
Falling

Cost-saving relocations on the rise

  • Given macroeconomic uncertainties and the pressure on operating-cost optimisations, more companies have adopted a cautious leasing strategy. Shenzhen’s Grade A office market recorded a net absorption of around 200,000 sqm in 1Q24, over 40% of which was contributed by company self-use.
  • The rent gap between lease renewals in more mature projects and new leases at newer buildings has widened, leading to more cost-saving relocations. In addition, some companies took the opportunity to upgrade to reasonably priced Grade A office buildings.

Overall vacancy rate remains stable

  • In the first quarter, a total of four Grade A office buildings were completed, adding approximately 286,000 sqm of new supply. The new office supply was scattered roughly evenly across the three urban submarkets.
  • Due to the relatively high degree of self-use in newly-completed buildings and the volume pricing strategy in stock projects that helped with improving occupancy, the overall vacancy rate stood at 25.6%, mostly unchanged from 4Q23.

Rents continue to fall due to volume pricing

  • In 1Q24, rents have started to stabilise for previously heavily discounted projects with improved occupancy. However, with lease expirations approaching, some landmark projects with higher rents have offered discounts in order to retain tenants.
  • Institutional investors were generally cautious about Shenzhen’s office market, and the demand for investment was tepid. Certain office projects with M0 land-use type received attention from industrial buyers for self-use.

Outlook: Rents to keep falling with increasing supply pressure

  • Over the next 12 months, there is expected to be 1.5 million sqm of new Grade A office supply in Shenzhen. Despite having a relatively high degree of self-use, the unbalanced recovery of demand will likely continue to pose challenges to overall absorption, and the overall vacancy rate is likely to rise.
  • Landmark projects with higher rents are expected to continue to lower rents, causing other projects to follow suit, perhaps at a smaller discount rate, closing the rent gap between premium and average projects. Therefore, rents are expected to continue declining in the short term.

Note: Shenzhen Office refers to Shenzhen's Grade A office market.

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