Leasing slows amid conservative sentiment

• Shanghai recorded 160,400 sqm of net absorption in 2Q23. Renewals and cost-saving strategies have become more common amid a slow economy and market uncertainty. Absorption in the CBD recorded 6,300 sqm, with demand for headquarters in new projects balanced by conservative approaches from many tenants, including some which even released space.
• Decentralised absorption reached 154,200 sqm. Pre-commitments in new completions accounted for the majority of the quarter’s take-up. This was particularly true for new projects in popular submarkets like Qiantan and Suhewan, as well as for projects willing to negotiate rents and incentives. 

Eight projects deliver more than 737,000 sqm

• In the CBD, two projects added 104,000 sqm to the Changning District. CBD vacancy rose 1.1 ppts q-o-q to 11.9%. One of the new completions achieved healthy pre-leasing, with several anchor tenants committing.  
• In the decentralised market, six projects delivered more than 633,000 sqm, causing the decentralised vacancy to rise 3.6 ppts to 27.7%. New Bund Square City in Qiantan was sought after by tenants, while projects in Zhenru attracted cost-conscious tenants as landlords proactively adjusted leasing strategies. 

Large supply and cautious sentiment pressure rents

• Overall rents continued to decline as tenants slowed their pace of leasing decision-making, impacting landlord sentiment. CBD rents fell 1.7% q-o-q, a result of cost-saving decentralisation and renewal trends combined with a large expected supply. Many landlords have adjusted leasing strategies to maintain occupancy levels. 
• In the decentralised markets, rents fell 2.0% q-o-q. The quarter’s supply surge put pressure on rents for projects and submarkets recording high vacancy. Tenants favoured projects with landlords that were willing to negotiate rents or offer incentives to balance fit-out expenses. 

Outlook: Weak sentiment expected to slow pace of recovery

• We expect the market to recover at a slower-than-expected pace as market uncertainty leads tenants to stay conservative, further dragging on landlord sentiment. Vacancy is anticipated to continue trending upward as tenants exercise caution in leasing while more supply reaches the market.
• We also expect rents to remain under pressure as many tenants choose to renew leases and landlord sentiment remains weak. Upcoming large supply will likely lead landlords to offer more incentives as the market increasingly favours tenants. We expect rents to stabilise in 2024.