Tenants prioritise low rents when making decisions

• The number of market enquiries has edged up in the quarter. After several rounds of rent negotiations with tenants, landlords have offered more favourable leasing terms to facilitate the progress of their lease agreements. The main source of leasing demand was from small to medium-sized tenants seeking cost-saving relocations.
• The TMT sector made up 30% of the Grade A leasing volume. A notable transaction involved one semiconductor company upgrading to a Grade A project in the Olympic Area, leasing a 5,000 sqm area. Domestic tenants continued to dominate leasing demand. 

Cinda Centre enters the market, driving up the vacancy rate

• Cinda Centre, a new project with a total GFA of 140,000 sqm located in the East Second Ring Road area, entered the market in the quarter. This project started its pre-leasing stage at end-2022 and a large amount of vacant space has been left unabsorbed. The landlord has been under pressure due to the slow destocking pace in a challenging market environment.
• The overall vacancy rate increased by 0.6 percentage points to 11.8%. The rise was mainly due to the sizable amount of unabsorbed space in the new project, while vacant spaces at existing projects were being absorbed slowly.

Significant rent declines across the city

• Average rents in the overall market declined 4.2% on a q-o-q basis. After providing add-on services for several quarters, such as customised decoration, landlords have found flexible leasing strategies to be of limited utility. In 4Q23, most landlords realised that direct rent reductions were the only effective way to trigger deals.
• Investors were cautious about making investment decisions due to the continuous downward trend in the office leasing market. The market yield decompressed continuously in the quarter.

Outlook: Rent declines to continue in 2024

• Grade A office rents are expected to fall by 7.2% in 2024. Landlords are likely to continue to provide significant rent reductions in a competitive leasing market. The low-rent environment is expected to accelerate the relocation decisions of tenants and further stimulate those who do not have immediate leasing demands to make moves for cost-saving reasons.
• No new completions are expected in 2024, leaving space for landlords of existing projects to backfill vacancies. In a market environment of continual rent decline, a faster absorption of these vacancies is expected in 2024.