Is Shanghai the strongest office market in the world?

January 11, 2013 / By  

2012 was a slow year for rental growth in the Shanghai office market. Coming off of stellar rental growth of 17.4% and 19.3% per annum in 2010 and 2011, full year rental growth in 2012 came in at a mere 2.2% in the CBD as many multinationals were forced to put expansion plans on hold due to domestic and international economic uncertainty. However, the hidden story is that of net absorption – our broadest measure for demand in the office market. The full year figure for 2012 in Shanghai reached an impressive 539,000 sqm. While this is not a record high for Shanghai, by my estimation it is still the highest level of net take-up seen in any city in the world in 2012. (If you can think of a city that’s greater, please post a comment!). Major world capitals and developed Asian cities had only a fraction of this total, and only Indian cities were even in the same ballpark.

The key reason for all of the take-up is the popularity of Shanghai’s decentralised market, which contributed 65% of the city’s total in 2012. Decentralised offices in Shanghai are high-rise offices that meet our Grade A specifications and are located within about 10 km of the traditional CBD.

Decentralised office buildings have proven to be extremely popular for several reasons. First, the space is high quality and relatively less expensive than the CBD. Large corporate occupiers such as Nike and Disney have decided to move to decentralised areas to expand, save on costs, consolidate multiple offices, or move closer to their other business operations located on Shanghai’s fringe. New decentralised Grade A buildings have also proven very popular among domestic companies upgrading to high quality space for the first time in their local submarkets. These two sources combined have propelled huge take-up volumes of new decentralised space.

It is impressive that city planners have had the foresight to designate more decentralised land for office use, seeing that the CBD alone will be unable to meet Shanghai’s office needs of the future 10-20 years. Even in uncertain economic times, decentralised offices make sense for many companies looking to save on costs.

The Lujiazui financial district in Pudong is now more than 96% occupied. However, this was not always the case. Fifteen years ago the area was considered by many to be a monument to government excess and hopelessly ambitious. The same sentiment re-appeared during the Global Financial Crisis, as many questioned whether the latest generation of huge office buildings would ever be filled. Sure enough, they were. Now, the same questions are being asked about the wisdom of local governments’ pursuit of decentralised office development. But, as the take-up figures show, the demand is clearly there. With the CBD nearly full and new development sites in short supply, the decentralised areas represent the future of Shanghai’s office market more than ever before.

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