Varied manifestations of budget-cutting in office strategies

• Amid the cost-cutting trend across business sectors, firms have taken a budget-conscious approach in office leasing. Hence, renewals remained the most popular choice when leases expired. Some tenants seized the opportunity when rents were low and relocated at a lower price point, sometimes opting for a better location.
• With limited new supply, the quarter’s net absorption was a mere 83,000 sqm, and over 50% of it was from self-use demand for headquarters and strata-sale buildings. In addition, properties run by the government were also gaining popularity with subsidised rents. 

Vacancy rate stabilises in face of large incoming supply

• Ten projects that we previously predicted to launch in the quarter were delayed to 2H23, awaiting finishing touches in construction and the government’s final inspection. Hence, only Super International Centre has entered the market, marking the first completed Grade A project in Shenzhen Bay Headquarters Base, and bringing the city’s total Grade A office stock to 12.3 million sqm.
• The overall vacancy rate in Shenzhen’s office market temporarily stabilised at 22.6% in 2Q23, which could, however, very quickly jump to over 26% in the second half of the year with the immensely concentrated release of supply.

Rents drop by a wider margin due to anticipated hike in vacancies

• Some landmark projects aggressively lowered rents to cope with planned tenant departures, which, in turn, triggered surrounding projects to spontaneously enter the price war in order to retain existing tenants at renewals, particularly with the recovery of leasing demand lacking the strength to rapidly fill up vacancies. Thus, Shenzhen’s average rent fell by 2.5% q-o-q.
• Despite more investors than usual enquiring about Shenzhen’s office properties, a smaller percentage of them reached the offering stage. Hence, the anxious property vendors were willing to give more room for negotiation. However, with the falling rent and eroding investment yield, owner-occupiers remained the major force behind office purchases.

Outlook: Competition for existing tenants could greatly suppress rents

• A record-breaking 2.8 million sqm of Grade A office supply from 32 buildings is expected to be introduced to the market in the next 12 months; in particular, 19 of these will be delivered in 2H23 after major project delays in the quarter. The anticipated self-use absorption of over 0.5 million sqm in the next six months may not be able to prevent the vacancy rate from exceeding 26%.
• The project completion backlog in the remainder of the year is expected to cause rents to slide further, as landlords will likely offer heavier rent cuts to compete for existing tenants with rising budget awareness, and it is unlikely that significantly greater demand for office space will emerge in the short term.