Rental decline and increased incentive offerings continue to trigger relocation and upgrade demand

• Net absorption recorded 46,200 sqm in the CBD. Relocation and upgrade demand came from within the CBD or fringe areas, driven mainly by domestic financial and professional services. Some tenants remained cautious, negotiating favourable renewal terms.
• Net absorption in the decentralised submarkets recorded 45,000 sqm. Rental decline incentivised a diverse tenant base to optimise their leasing strategies. Some tenants from Grade B and suburban areas upgraded to Grade A projects amid diminishing rental disparity.

Three new projects enter the market, delivering 180,000 sqm of space

• Two projects delivered 86,000 sqm to the CBD market, pushing the vacancy rate to 16.7%, an increase of 0.3 ppts q-o-q as limited pre-leasing was observed.
• One project of 94,000 sqm reached completion in the decentralised market. As pre-leasing was relatively sluggish amid intensified competition, the vacancy rate increased by 0.2 ppts q-o-q to 29.2%.

Overall rents remain in a downward cycle as the overall market stays tenant-favourable

• In the CBD market, rents decreased by 2.2% q-o-q to 7.1 RMB/sqm/day. To retain existing key tenants or attract new ones, landlords remained flexible in negotiations on renewal and new lease terms.
• In the decentralised market, rents decreased by 2.6% q-o-q to 4.6 RMB/sqm/day. To attract demand from tenants, landlords continued to offer substantial incentives, particularly in submarkets or projects with high vacancy rates.

Outlook: The market remains tenant-favourable due to large supply and subdued incremental demand

• Overall demand is expected to remain cost-driven, with tenants seeking more advantageous leasing terms. This includes rental reductions, extended fit-out periods, CapEx reimbursement and other strategies to reduce their CRE costs.
• Overall market rents are expected to continue their downward trend in the short term, driven by conservative market sentiment and large supply.