APPD Market Report Article
ShenzhenNovember 29, 2022
Silvia Zeng, Head of Research, South China
Leasing demand deteriorates amid economic uncertainty
- Shenzhen’s export-oriented economy was heavily impacted by the ongoing complex international situation and regional COVID-19 flare-ups in the third quarter. Local enterprises have steered towards a more conservative business strategy, leading to a weakening office leasing demand. Of note, 71% of the quarter’s 330,000 sqm net absorption was for self-use.
- For the two pillar industries in the Shenzhen economy, while TMT firms have generally been adopting simplification initiatives, which led to a drop of over 60% q-o-q in its leasing volume, leasing demand from the financial industry has remained relatively steady with some notable transactions in the quarter.
Vacancy rate increases slightly with five new completions
- In the third quarter, five Grade A office buildings were completed, including four headquarters and one for leasing, delivering about 480,000 sqm of new supply to the office market. By the end of 3Q22, the total stock of Grade A office buildings in Shenzhen had increased to 11.7 million sqm.
- Due to the considerable amount of self-use office space absorption in the quarter, overall vacancy has only increased slightly by 0.4 ppts q-o-q, to 21.7%. Notably, DJI Headquarters accounted for 200,000 sqm.
Largest quarterly rental drop since the COVID-19 outbreak in 2020
- Under speculations of gloomy economic conditions, a faltering office leasing demand, and combined with a consistent influx of supply, landlords of existing buildings who are facing tenant outflows had to concede rents for lease renewals and new lettings, so as to maintain a relatively stable rental return. As a result, Shenzhen’s overall rents decreased by 2.8% q-o-q.
- Both self-users and investors have become more conservative with investing in Shenzhen’s offices, due to a tighter budget control and declining rental returns. Hence, overall capital values have slid further in the quarter. However, sales in high-quality properties, such as Shenzhen Metro Property Building, were recorded at reasonably stable prices.
Outlook: Demand stagnation and oversupply to keep pressuring rents
- The uncertainty in the global and domestic economies will likely continue to weigh on companies’ revenue expectations, leading to a weaker office leasing demand for the coming year. Therefore, the net absorption of 2022 is expected to be under one million sqm, decreasing by around 30% y-o-y.
- In the next 12 months, Shenzhen’s Grade A office market is projected to have more than 2.5 million sqm of new supply. Under such a large scale of new supply and the weakening demand, a soaring vacancy rate and a plunging rental level would seem inevitable.