Incremental demand from selective industries emerges amid overall caution

• Most firms took extra caution with real estate strategies to control total operating costs, with stronger preferences towards furnished offices provided by landlords when deciding between available office options.
• E-commerce, overseas brand services and related industries expressed expansions or upgrades needs due to business growths. With reasonable discounts, leases were quickly signed. Adding to self-use, the quarterly net absorption surged to nearly 300,000 sqm.

Emerging submarkets lead improvements in the citywide vacancy rate

• Three new Grade A offices entered the market in the quarter, adding about 311,000 sqm to the supply. One is fully for leasing, the other two are wholly self-use corporate headquarters of a tech giant and a bank, respectively.
• A few e-commerce or tech firms upgraded or expanded to Grade A offices in Pazhou and Guangzhou International Financial Town with heavy discounts and lease incentives. Thus, despite new supply, vacancy rates of the two submarkets noticeably fell.

Lower total expenditure is a key driver behind relocations

• Under sufficiently large high-quality supply, office landlords provided further rent reductions and lease incentives to lure existing tenants to relocate. This is particularly tempting to clients when space-upgrading and cost-saving could be achieved simultaneously.
• The average rent affordability of emerging industries related to e-commerce or overseas brand services is relatively low despite rapid space expansions. For the sake of their hefty lease sizes, landlords were willing to offer exclusive discounts.

Outlook: Industrial innovations might help induce office demand

• Booming applications of artificial intelligence in various business scenarios are likely to inject growth potentials into Guangzhou’s pillar industries. Relevant sectors could in turn create incremental demand for office space.
• Landlords of certain office projects, particularly those in Pazhou, have been actively engaged in conversion-to-hotel, which might help alleviate supply-side pressure of emerging submarkets. Yet, landlords may continue lowering rents to compete for existing tenants.