Leasing momentum slows notably

• The initial recovery in demand observed at the beginning of 2023 did not persist, resulting in soft leasing demand in the quarter. Tenant relocation demands were constrained by low budgets. Meanwhile, a longer negotiating period was also observed, especially for large leasing demands above 1,000 sqm.
• The industry distribution of leasing transactions was more diversified. TMT industry tenants contributed one-quarter of the total leasing volume, and among them, gaming companies showed notable momentum. Across the city, the number of site visits dropped significantly, even in the previously stable CBD area, where landlords continued to provide more flexible strategies to attract tenants.

Overall vacancy rate compresses slightly

• The overall vacancy rate compressed slightly to 10.3%, with overall net absorption decreasing by one-third compared to 1Q23. Although the space-surrendering trend faded out in the quarter, softening leasing demand still resulted in limited net absorption citywide. Landlords were under great vacancy pressure due to the slower-than-expected take-up pace.
• No new supply entered the market in the quarter as some scheduled projects postponed their completion dates to the next quarter. Unabsorbed space from previously completed projects continued to weigh on areas such as Lize.

Rent decline continues as market pressures mount

• The downward trend of Grade A overall rents continued, reporting -1.8% q-o-q and -4.0% y-o-y. Given a market environment of weak demand, landlords have started to provide considerable rent discounts, even for small-sized spaces under 500 sqm.
• The notable transaction in the investment market was made by Tinavi Medical Technologies, a leading company focusing on orthopedic surgical robots, which purchased the building T7 with a GFA of 8,905 sqm, in Zhongguancun Xisanqi (Jinyu) Science Park. This transaction reflects continuous interest from self-use investors in the Beijing market.

Outlook: Vacancy pressure amplifies with supply peak in 2H23

• The rent adjustment period is expected to continue through 2024. Overall Grade A rents are expected to drop further in the upcoming quarters as market pressures remain. Tenants will likely leverage this favourable market environment to bargain for more preferential leasing options.
• The completion dates of some future projects have been postponed to the next quarter. Thus, three new projects with a total GFA of 360,000 sqm will enter the market in the second half of 2023. Due to the slow recovery of leasing demand, landlords are expected to be affected by significant supply pressure.