Self-use demand is the main contributor to net absorption in the quarter

• Incremental leasing demand remained limited due to corporate budget control. State-owned enterprises and large private firms upgrading from non-Grade A offices to self-use headquarters accounted for the majority of this quarter’s net absorption.
• Although the number of large-scale leasing transactions was limited in the quarter, these transactions were still primarily driven by office upgrade or expansion demand from cross-border e-commerce companies and their related service providers.

New supply drives vacancy rate up

• Three new Grade A projects in the Luohu and Qianhai precincts were completed and entered the market, adding a total of 277,700 sqm of office space, including one headquarters office building for company self-use.
• Despite the continued destocking of existing projects, several projects experienced lease terminations and lease area contractions due to corporate business adjustments. Thus, the citywide vacancy rate increased by 0.8 ppts q-o-q to 25.2%.

Ongoing decline in rents due to oversupply

• Persistent vacancy pressures and constrained leasing demand growth compelled landlords to implement further rent reductions, augmented by extended rent-free periods and flexible lease terms. Thus, rents continued to fall by 2.7% q-o-q in the quarter.
• Risks of deteriorating occupancies led investors to demand higher cap rates. The irreconcilable gap in yield expectations between investors and vendors made it difficult to close transactions. Yet, end-users continued to show interest in industrial offices.

Outlook: Supply may continue to weigh on rents

• In the next 12 months, about 1.2-1.5 million sqm of new supply is expected to enter the market. Given the persistent supply-demand imbalance, citywide vacancy rate is expected to stay high and rents to decrease further.
• Nearly 30% of this new supply will be allocated for company self-use, providing support to the overall demand. Additionally, emerging sectors like consumer electronics and new retail may opt for office upgrades and expansions due to business growth.