COVID-19 outbreak in Guangzhou weakens leasing demand in 4Q22

• Guangzhou encountered the worst outbreak of COVID-19 cases of the past three years in 4Q22. This was followed by strengthening COVID-19 prevention measures, affecting various economic activities including leasing. Despite loosening measures in December, various activities remained restricted as city-wide infections rose.
• Although overall leasing demand stayed relatively weak in 4Q22, certain state-owned entities as well as companies from professional services and gaming industries completed sizable leasing transactions in ZJNT and Tianhe North submarkets, providing some support to the overall leasing market.

One Grade A office building completes in 4Q22

• One building, Laifeng International Center, was completed in the quarter, adding around 46,000 sqm to Grade A office stock. Total stock in Guangzhou reached nearly 7.8 million sqm by the end of 4Q22.
• Despite the lack of active leasing demand, overall vacancy remained relatively stable as limited new supply was recorded in 4Q22. By the end of 2022, Guangzhou’s vacancy rate remained at around 17.6%.

Overall rent continues to decline in 4Q22

• Overall rent continued its decline in 4Q22. Given the consistently quiet demand, some landlords, especially those with ZJNT buildings who saw little absorption of vacancy throughout 2022, have continued to lower their rents to improve occupancy rates before the end of 2022. Consequently, overall rent fell by 1.3% q-o-q in 4Q22.
• The investment market was relatively tranquil as no en-bloc transaction was completed in 4Q22. Cross-region travel and site-visits became very difficult for investors due to enhanced pandemic prevention measures. The downward movement of rents in Guangzhou during recent quarters also raised investors’ concerns. Such market sentiment led to the 1.2% q-o-q drop in capital values in 4Q22.

Outlook: A tenant’s market is to be the main theme in 2023

• The easing COVID-19 restrictions and issuance of stabilising policies to various industries, including real estate, are expected to stimulate economic recovery in 2023. Although uncertainties of business and mobility recovery may remain in the short term, market sentiment and the overall economy are expected to recover in a quicker manner during 2H23, thus facilitating office leasing demand.
• Over 1 million sqm of supply is scheduled to be completed in 2023. As demand may take time to recover, such concentrated supply could add to the leasing demand-supply imbalance. Landlords’ bargaining power may also be dented, especially those of 2023’s new completions and existing projects that saw little absorption in 2022, putting tenants in a more favourable position during rent negotiation.