APPD Market Report Article
ShenzhenFebruary 28, 2023
Silvia Zeng, Head of Research, South China
Leasing demand decreases amid COVID-19 resurgence
- Due to sharp rises in COVID-19 infection cases after restrictions eased in December 2022, the number of clients visiting office building sites has declined significantly. Enterprises continued to contract office space or even withdraw from their existing offices. Combined with much less self-use demand, net absorption in the quarter recorded only about 150,000 sqm, a drop of 55% q-o-q.
- Leasing demand from financial and professional services declined by more than 50% q-o-q, due to the COVID-19 resurgence hindering mobility and everyday business activities. In contrast, the leasing volume for the TMT industry was comparably more stable, even recording an increase for IT & software service companies.
Vacancy rate rises under weak demand and high supply pressure
- In the fourth quarter, a total of three Grade A office buildings were completed, two in Nanshan and one in Futian. All of them were mainly for leasing, bringing about 410,000 sqm of new supply to the market. By the end of 2022, the total stock of Grade A office buildings in Shenzhen reached 12 million sqm.
- Under the persisting conditions of weak office demand and high supply pressure in the fourth quarter, the vacancy rate rose 1.4 ppts q-o-q to 23.1% at the end of 2022.
Rents record the largest decline since the start of the pandemic
- Amid the sluggish leasing market, owners facing high vacancy pressure, especially for landmark buildings with larger sizes, substantially reduced rents to attract tenants. Most owners were also willing to renew leases at lower prices in order to retain existing tenants. As a result, rents fell 3.7% q-o-q in the quarter, the biggest quarterly drop since 2020.
- Overall capital values decreased as rents went down sharply. With investment yields declining, institutional investors showed less interest in buying office properties, and the four bulk transactions JLL tracked in the quarter came mainly from end-users. Among them, half was contributed by companies from the TMT industry.
Outlook: Demand to gradually recover while oversupply persists
- With the loosening of COVID-19 control measures and the support from economic policies, Shenzhen’s economy is expected to recover gradually. The subsequent economic recovery will likely bring new expansion needs, helping the leasing market to regain its vitality. Annual net absorption is expected to exceed 1 million sqm in 2023.
- About 2.3 million sqm of new supply is set to enter the market in 2023, the highest ever recorded. About 70% of the space is for leasing, hence the phenomenon of oversupply is expected to continue. As a result, overall vacancy rate is expected to rise by more than 3 ppts, with rents continuing to fall.