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Shanghai Office Market Shows Signs of Recovery Despite Rent Decline

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Title: Shanghai Office Market Shows Signs of Recovery in Second Quarter Despite Rental Challenges

Subtitle: Increased demand and new supply impact rents and vacancy rates

Shanghai, China – Despite a decline in net absorption in the first half of 2023 compared to the previous year, the Shanghai office market has experienced a significant rebound in the second quarter, indicating a gradual recovery in demand. However, the increase in new supply has kept rental prices on a downward trend.

According to the “Review and Prospect of Shanghai Real Estate Market in the First Half of 2023” released by CB Richard Ellis, net absorption of high-quality office space in Shanghai reached 219,000 square meters in the first half of the year, reflecting a 31.6% decline compared to the same period last year and a 3% drop from the previous month. Lu Yan, head of the East China Research Department of CB Richard Ellis, stated that Shanghai’s office market demand has shown moderate recovery, albeit slightly weaker than expected.

The decline in net absorption during the first half of the year was primarily due to data from the first quarter. However, data from the second quarter reflects a notable rebound. CB Richard Ellis reported a net absorption of 180,500 square meters for high-quality office buildings in the second quarter, a significant increase from the first quarter.

Jones Lang LaSalle’s tracking of Grade A office buildings also indicated a positive trend, with net absorption reaching 160,400 square meters in the second quarter, more than double the figure from the first quarter. The central business district accounted for 6,300 square meters of net absorption, with most tenants adopting a cautious leasing strategy and some reducing their lease areas. In contrast, non-central business districts achieved a net absorption of 154,200 square meters, fueled by pre-leasing of new projects and favorable rental incentive policies.

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Financial institutions remained the main demand drivers in the Shanghai office market in the first half of the year, followed by the professional services sector and the technology, media, and telecommunications (TMT) industry.

Despite the rebound in demand, the office market in Shanghai is still facing challenges due to cautious leasing strategies by tenants and an increase in new supply. Rental prices have experienced a downward trend. Lu Yan noted that rental quotations for high-quality office buildings in Shanghai dropped by 1.1% to 272.6 yuan per square meter per month in the first half of the year due to increased market competition and the rapid increase in new supply.

Wang Yue, Senior Director of the Shanghai Commercial Real Estate Department at Jones Lang LaSalle, explained that the trend of declining rental prices continued into the second quarter. Central business districts saw rents fall by 1.7% compared to the previous month, while non-central business districts experienced a 2.0% decrease from the previous quarter. The surge in new supply projects and sectors with high vacancy rates contributed to the downward pressure on rental prices.

Looking ahead, CB Richard Ellis predicts that the second half of 2023 will see approximately 953,000 square meters of new supply in the Shanghai office market, the highest level in a decade. This supply is concentrated in areas such as Huamu, Xuhui Binjiang, and Zhenru, which will likely result in a significant increase in vacancy rates and further pressure on rental prices.

Chinese-funded enterprises were identified as the main drivers of office space growth, with 52% planning to increase their office space. The finance, technology, and professional services industries were at the forefront of the expansion intentions. The survey also revealed that tenants are seeking facility use rights and lease flexibility in their agreements.

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With most employees returning to the office, a significant portion of companies plan to increase fixed positions in 2023. Moreover, more companies are willing to pay a premium for green buildings, indicating a growing emphasis on sustainability.

While the Shanghai office market is showing signs of recovery, the abundant new supply and cautious leasing strategies will continue to shape the rental landscape in the coming months.

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