APPD Market Report Article
BeijingNovember 29, 2022
Mi Yang, Head of Research, North China
Market activity drops off after an uptick
- Demand was restrained by current market conditions. Leasing activity dropped off after an uptick at the beginning of 3Q22. Tenants, especially several large-scale companies, have become more cautious about making leasing decisions. In the quarter, deals under 2,000 sqm accounted for 83% of total transactions in terms of amount.
- One previously strong demand pillar, the TMT sector, has slowed down expansions in the past several quarters. Several TMT giants have entered the consolidation stage by moving into their self-use projects, including wholly leased and purchased buildings. The leasing market in 3Q22 was mainly supported by domestic financial companies, which contributed half of the leasing demand.
Vacancy rate decline slows
- As the leasing market cooled down in the second half of 3Q22, quarterly net absorption saw a notable decline, recording a 70% q-o-q change. Despite weakening demand across the city, recent completions in the CBD Core Area continued to fill up, slowing the downward trend of vacancy rates with a slide of only 0.1 ppts to 9.7%.
- No new projects completed in the quarter. Some recent completions in Lize and Olympic Area continued to report considerable unabsorbed space, which had significant impact on the overall vacancy rate.
Landlords provide more flexible rental strategies
- The downward trend in overall rents continued, with negative rent growth of -0.4% q-o-q. Seven out of a total of nine submarkets across the city reported negative rent growth. To attract tenants, some landlords have become more flexible, providing rent concessions or longer rent-free periods.
- The investment market was relatively quiet in the quarter. Sunshine Insurance, an existing partner at Beijing Shipbuilding Building in the Shilihe area, bought the remaining 50% stake of the office project from Landsea Green.
Outlook: Challenge to maintain overall rent stability by end-2022
- With the lag effect from the COVID-19 outbreak in May 2022, the outlook on overall rents was lowered for 4Q22. Rental value in 2023 is still expected to increase but at a lower growth rate. Approximately 500,000 sqm of future supply will enter the market before end-2023, and consequently, net absorption is predicted to improve to 260,000 sqm.
- The consolidation of TMT giants in Wangjing since the beginning of 2022 has led to the surrender of sizable local space scattered across Wangjing, as the buildings they purchased or wholly leased near Wangjing become ready for occupancy. This trend is expected to continue in the coming quarters and landlords will likely experience more vacancy pressure.