Rebound in confidence generates stronger office demand

July 19, 2023, Shanghai -- CBRE recently released China Office Occupier Survey 2023, which showed that confidence is strengthening among both domestic and foreign companies in China with three-quarters of businesses expecting revenue growth in 2023, and 42% of companies state their intention to increase their office footprint. The increase in demand is largely being driven by domestic companies.

The survey findings reveal an across-the-board acceleration in how companies incorporate ESG strategies into real estate planning and operations, with a notable increase in the intensity of implementing energy audits, promoting the recycling of resources, and setting net-zero emission goals. More occupiers are willing to accept a green premium. The proportion of companies willing to pay additional rents to relocate to green buildings rises to 16% this year, registering an increase of 13-pps from 2022.

CBRE's 2023 China Office Occupier Survey was conducted from March 22, 2023, to April 21,2023, A total of 315 respondents (62% domestic, 38% foreign) participated in the survey, which asked corporate occupiers a range of questions covering issues such as future portfolio planning, workplace design and improvements, and Environmental, Social and Governance (ESG) goals.

Rebound in confidence generates stronger demand

The survey results indicate that business expectations have rebounded, with a 76% of companies expecting to achieve revenue growth in 2023, marking a substantial increase of 71-pps compared to 2022.

The survey results indicate that 42% of companies plan to increase their office space over the next three years, a slight increase of 4-pps from 2022, but significantly lower than the 59% reported in 2021.

CBRE expects leasing activity to gradually improve along with the strengthening economic and business confidence. Nationwide office market net absorption in 2023 is expected to reach 4.3 million sq. m, surpassing levels witnessed in 2020 and 2022 and reaching about 60% of the historical peak registered in 2021.

Domestic companies continue to display stronger demand. 52% of domestic companies plan to increase their office space over the next three years, a y-o-y increase of 10-pps. The primary drivers of office leasing demand continue to be the finance, TMT, and business services industries, with companies in these sectors showing the strongest intentions to expand. The survey uncovered marked intent on the part of manufacturing and life sciences companies to increase office space, registering increases of 13-pps and 18-pps, respectively.

 

Moderate growth expected as occupiers stay cost-focused

Nearly 80% of respondents stated that the growth rate of their real estate rental expenditure over the next three years will not exceed the growth rate of overall operational costs. Rental budgeting exerts a direct influence over corporate real estate strategy, with corporations intending to raise their share of rental expenditure expressing a robust aspiration for expansion and flight-to-quality. Among companies planning to trim their rental costs, several strategies are emerging as favourites. These include renegotiating existing leases, exercising lease expirations or contraction options, consolidation, and relocation.

Depending on whether occupiers are opting to expand and upgrade, or contract and consolidate, there is a varying degree of focus on facility usage rights and lease flexibility. Expectations for greater facility usage rights and leasing flexibility are on the rise, with 60% of occupiers requesting the right to use shared office facilities both within their leased building and across other buildings owned by the same landlord. Over a quarter of occupiers would like to be provided with furnished units by landlords to enhance lease flexibility.

 

New technologies enhance office space efficiency

With most employees returning to the office after the relaxation of pandemic prevention and control measures, there has been a noticeable shift in workplace strategies. Some 30% of companies now plan to increase the number of dedicated seats, a jump of 10-pps from 2022.

Average office utilisation for domestic occupiers in China stands at 67%, comfortably above that for companies in most other markets worldwide, largely thanks to the relatively mild impact of remote working. Very-large sized occupiers with a nationwide footprint of over 50,000 sq. m. have the highest office utilisation rates, while small and medium sized occupiers, which are often limited by the singular function of their workplaces which restricts their ability to implement activity-based working, have relatively lower utilisation rates.

Occupiers expect to make greater use of advanced real estate technologies such as sensors to accurately gauge office usage and enhance space efficiency. CBRE has detected a similar trend in mainland China, with nearly 60% of companies surveyed showing an interest in technology related to office utilisation, such as desk reservation tools (58%) and space occupancy sensors (56%).

 

ESG adoption accelerates

The survey findings strongly correlate with this trend, with responses revealing an across-the-board acceleration in how companies incorporate ESG strategies into real estate planning and operations. While employee wellness remains a key ESG measure, there has been a notable increase in the intensity of implementing energy audits, promoting the recycling of resources, and setting net-zero emission goals.

More occupiers are willing to accept a green premium. The survey found that 66% of respondents expressed an interest in relocating to green-certified buildings, marking a significant increase of 16-pps from2022. The proportion of companies willing to pay additional rents to relocate to green buildings rises from 3% in 2022 to 16% this year. Some 28% of respondents expressed a willingness to allocate a certain amount of capital towards upgrades and eco-friendly modifications for their existing buildings.

The survey found an increasing number of occupiers putting more emphasis on the integration of green clauses into their lease agreements. Some 19% of surveyed occupiers plan to include green clauses in future leasing agreements, with the highest levels of attention paid to conditions pertaining to green retrofitting, waste management, and the disclosure of energy consumption data.

CBRE expects that as authorities continue to tighten control mechanisms over carbon emissions from public buildings, and as the importance of gathering and evaluating energy usage and carbon emission data grows in order to help landlords and tenants achieve their carbon neutrality goals, the standardisation and formalisation of green leasing practices within the commercial real estate industry will accelerate.