APPD Market Report Article
GuangzhouAugust 26, 2022
Silvia Zeng, Head of Research, South China
Leasing demand shrinks during economic volatility
- In 2Q22, as the domestic economy faced difficulties from the COVID-19 resurgence and supply chain issues in the Yangtze River Delta area, Guangzhou’s economic activities have also been hindered by new local COVID-19 waves. Many firms opted to remain conservative with office rental decisions, leading to sluggish leasing demand.
- As a result, there were few significant lease transactions recorded in 2Q22, particularly ones with a lease size of more than 4,000 sqm, due to the “wait-and-see” approach adopted by most firms towards leasing decisions.
Three Grade A office buildings complete in 2Q22.
- Three buildings, all located in the Pazhou submarket, were completed in the quarter, together adding over 168,000 sqm to Grade A office stock, and the total stock in Guangzhou thus rose to nearly 7.5 million sqm by the end of 2Q22.
- On top of consistent supply and weak leasing demand, additional vacant space was released to the market when an Internet giant relocated from its previous office in ZJNT to its self-built headquarters. Consequently, Guangzhou’s overall vacancy rate increased significantly by 2.0 ppts to 15.6%.
Rental and capital values both on the decline
- The confluence of a faltering demand and a consistently high vacancy rate has cast a shadow over landlords’ bargaining power over rental prices, leading to a 2.5% q-o-q decline in the average rent of Guangzhou offices. Particularly in the ZJNT submarket, the mounting vacancy in this area has heightened landlord anxiety, leading to shrinking rents.
- No en-bloc office sales transactions were recorded in the quarter. Several developers facing refinancing issues sought buyers for their core real estate assets in order to obtain sufficient cash flow for debt repayment. This has led to falling prices for these assets, which also affected the capital values of nearby projects.
Outlook: Rents in Guangzhou unlikely to recover in the short term
- In early-2022, the re-emergence of COVID-19 in multiple cities across the nation resulted in greater uncertainty over the prospects of economic development in 2H22. Many measures were announced to promote economic stability and steady growth, in order to stimulate leasing demand in 2H22.
- However, the recovering demand may not be able to absorb over one million sqm of office space that is expected to enter Guangzhou’s Grade A office market in the next 12 months. This may result in even higher vacancy and greater competition for tenants. Hence on the whole, rents are anticipated to face downward pressure in the coming 12 months.