Leasing demand shows signs of recovery

• The recovery of Guangzhou’s economy continued in 2Q23. However, due to variations in performance across different industries, companies remained concerned about economic uncertainties and their own short-term performance. Consequently, corporate tenants stayed cautious towards office leasing decisions, which, in turn, led to relatively slow absorption during 2Q23.
• In 2Q23, the Pazhou submarket recorded a few large-size transactions of over 4,000 sqm, which were all for cost-saving office expansions, relocations or upgrades, as these companies were taking advantage of the current “tenant market” to complete deals at an economical price.

Overall vacancy rises due to sizable new supply

• Four buildings were completed in the quarter, adding around 430,000 sqm to Grade A office stock. The total stock in Guangzhou reached nearly 8.4 million sqm by end-2Q23.
• Despite the recovering leasing demand, market absorption did not experience a significant boost in 2Q23. In the face of new supply, the overall vacancy rate continued to rise, increasing by approximately 3 percentage points (ppts) to around 21.8% by the end of the second quarter.

Landlords’ negotiating power weakens

• Due to the slow recovery of leasing demand, continuously increasing vacancy rates and corporate tenants’ rising awareness of cost controls, landlords’ bargaining power weakened consistently, leading to a drop in rents of 1.5% q-o-q in 2Q23.
• One en-bloc transaction involving an office property in Yuzhu was recorded within 2Q23, and the asset was purchased by a self-user. However, this transaction did not boost the investment market due to the continuously weak rental performance. Consequently, capital values continued declining.

Outlook: Companies’ cautious approach to persist in 2H23

• In the near term, normalisation and stabilisation may remain the main themes of the Chinese economic recovery in 2H23. Hence, although the continuous repair of the domestic economy is anticipated, economic uncertainties could also persist, delaying the recovery of companies’ expectations and confidence.   
• Under such economic circumstances, companies could stay cautious and cost-oriented towards expansions, negatively affecting the release and recovery of leasing demand for 2H23. Combined with the considerable new supply scheduled in 2H23, vacancy rates are expected to rise consistently, further limiting the potential for short-term rent increases.