Rental declines and increased incentives continue to drive demand for upgrading

• Overall net absorption reached 149,600 sqm in Q4 2024, totalling 476,300 sqm for the year. The decline in rents triggered cost-driven demand in both the CBD and the decentralised market, with some larger occupiers securing favourable terms and upgrading to new offices.
• CBD net absorption climbed to 78,800 sqm in Q4 2024, while the decentralised market recorded 70,700 sqm. The narrowing rental disparity across Grade A, Grade B and suburban projects incentivised tenants across different industries to optimise their leasing strategies.

138,814 sqm of new supply entered the market in Q4 2024, contributing to total annual new completions to ~661,600 sqm

• One project, totalling 122,414 sqm, entered the CBD market, pushing the vacancy rate to 16.4%, an increase of 0.2 ppts q-o-q and 1.5 ppts y-o-y.
• The first phase of a mega complex in Xuhui Bund was completed, adding 16,400 sqm to the DBD market. The vacancy rate decreased by 0.6 ppts q-o-q and 0.8 ppts y-o-y to 29.0%, mainly due to the cost-driven demand and relatively low supply resulting from project delays.

Rents remain in decline amid competition for tenants

• CBD rents declined by 3.7% q-o-q and 15.3% y-o-y. Landlords were flexible in both new leasing and renewal deals to maintain occupancy levels.
• In the decentralised market, rents dropped by 4.1% q-o-q and 13.8% y-o-y. Large available spaces continued to intensify market competition, pushing landlords to offer more appealing rental incentives.

Outlook: Cost-driven demand persists as rental decline continues and the influx of supply grows

• The market is expected to remain tenant-favourable due to large supply and subdued demand, with tenants increasingly leveraging these conditions to secure favourable leasing terms, including rental reductions, extended fit-out periods and CapEx reimbursement, etc.
• Although the rental decline is expected to slow next year, landlords will continue to compete for tenants by offering rental concessions and attractive incentives. They may also further adjust rental expectations for renewal tenants.