SWIFT RECOVERY IN DEMAND BACKED BY LEADING INDUSTRIES
RAPID REBOUND IN OFFICE NET ABSORPTION
After declining sharply following the onset of the pandemic in Q1 2020, nationwide net absorption returned to positive territory in Q2 2020. While the annual total fell 17% y-o-y to 3 million sq. m., performance in H2 2020 was upbeat, with net absorption rising 49% y-o-y to 2.7 million sq. m.
With the swift economic recovery enhancing business confidence, occupier sentiment towards committing to new leases continued to improve in the final months of 2020. CBRE’s Asia Pacific Office Occupier Survey conducted in October 2020 found 88% of respondents in China expect a better or stable business environment over the next six months. CBRE expects nationwide office net absorption to exceed 5 million sq. m. in 2021, a rise of 60% y-o-y.
TECHNOLOGY AND FINANCE COMPANIES TO DRIVE DEMAND
Technology and finance companies outperformed in 2020 and were largely unaffected by the pandemic. Government statistics show the IT & software services and financial industries achieved revenue growth of 13% and 6%, respectively, in Q1 2020, with growth picking up even further in subsequent quarters.
Oxford Economics expects employment within the finance & business services and information technology sectors to expand at a faster rate over the next three years (Figure 5 overleaf). This should translate to strong demand for additional office space.
The TMT sector’s proportion of leased space expanded by seven pps to 32% in 2020, with finance and business services remaining the other two main demand drivers. CBRE expects these industries to continue to dominate net absorption in 2021, aided by the “dual circulation” policy.
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TMT AND FINANCE INDUSTRIES OCCUPY THE MOST SPACE
Data Source: Oxford Economics, CBRE Research, January 2021.
1 Office leasing transactions include new set-up, expansion, relocation and upgrading.
OCCUPIERS RESET OFFICE STRATEGIES IN SEARCH OF AGILITY
THE OFFICE IS HERE TO STAY
While CBRE data show that around 86% of office occupiers in China permitted employees to work remotely following the onset of the pandemic, CBRE’s Asia Pacific Occupier Flash Survey conducted in October 2020 found that companies still prefer staff to work from the office. Employers continue to believe that the workplace offers advantages over remote work in terms of fostering innovation, employee engagement and team productivity. This indicates that physical office space will remain essential for companies in China.
OCCUPIERS SEEK GREATER AGILITY
Despite the positive outlook for future office demand, the pandemic and other factors such as the growing numbers of younger people in office-based employment are transforming working practices and reshaping the role, location, configuration and appearance of the office.
Offices have evolved from a standard and functional piece of hardware, to playing a more prominent role in driving corporate efficiency, productivity and profitability. Occupiers are also introducing features and practices supporting employee wellness along with facilities enhancing collaboration between individuals and teams.
Locational strategy is increasingly determined by both business needs and talent availability. This will lead to an overarching focus on agility, with CBRE’s survey finding that 72% of China-based occupiers intend to increase the adoption of hybrid working styles and rethink their attitude to headquarters, flexible space and home working requirements.
Occupiers plan to invest heavily in workplace technology to facilitate flexible working, with over 70% of respondents to CBRE’s Asia Pacific Occupier Flash Survey stating that they intend to incorporate such CapEx in future corporate real estate strategies.
MOST NEW SUPPLY LOCATED IN NON-CORE AREAS
NEW SUPPLY TO REACH HISTORICAL HIGH
The suspension of construction work following the onset of the pandemic resulted in 30% of new supply due in 2020 being pushed back to this year.
The delay will propel this year’s total new supply to a historical high of 9.6 million sq. m. This will comprise just over a third of the 24 million sq. m. of new space due to be added over the next three years.
TIER 1 CITIES TO SEE FEWER NEW COMPLETIONS
While new supply in Shanghai, Shenzhen and Beijing will fall below the three-year average, new stock in Guangzhou is forecasted to surge owing to an upcoming supply peak in Pazhou. However, available space will remain limited due to the recent absence of large-scale supply. Tier II cities are predicted to face comparatively stronger supply pressure.
CORE CBD AVAILABILITY TO TIGHTEN
New supply in core CBDs over the next three years will represent under 20% of overall new completions in major cities, with the ratio for Shanghai and Shenzhen falling to 10%. Beijing will also see core CBD supply decline after new supply peaks in the Chaoyang CBD area.
New supply in non-core locations accounts for more than 70% of overall pipeline stock. CBRE forecasts total vacant space in these areas will reach 19 million sq. m. by the end of 2021.
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DECENTRALISATION TREND POISED TO ACCELERATE
COST-SENSITIVE TENANTS SET TO DECENTRALISE
The large volume of new supply due to be completed in non-core areas will support decentralisation by cost-sensitive tenants, particularly in industries such as manufacturing and transportation & logistics.
Tenants in these sectors are increasingly seeking decentralised business districts providing high quality office buildings along with well-developed infrastructure and amenities.
Preferred locations include Qiantan and Xuhui Riverside in Shanghai, Pazhou in Guangzhou, Qianhai and Hi-tech Park in Shenzhen, Lize in Beijing, Qianjiang Century City in Hangzhou and the Wangjiadun Business District in Wuhan. New supply over the next three years in each of these locations is forecasted to exceed 500,000 sq. m.
In addition to new supply, other factors encouraging occupier decentralisation include the restructuring of real estate portfolios in the aftermath of the pandemic.
CBRE’s Asia Pacific Occupier Flash Survey found that around 25% of respondents said they would look to establish offices in new CBDs in future, while 33% indicated a preference for a “hub & spoke” locational strategy.
TIGHTER AVAILABILITY WILL SUPPORT A RENTAL RECOVERY IN CORE CBDS
RISING OCCUPANCY TO UNDERPIN RENTAL GROWTH
Rents in core CBD areas of major Chinese cities declined by 5-10% y-o-y in 2020 due to the effects of the pandemic at the beginning of the year along with ample new supply.
Over the course of the year, landlords deployed more flexible leasing strategies and were willing to negotiate rents to accommodate upgrading and expansionary demand from finance and business service companies.
Chaoyang CBD in Beijing remained the most popular core CBD area thanks to the launch of several high-quality office buildings, while Zhongguancun in Beijing, Zhujiang New Town in Guangzhou, Nanjing West Road and Lujiazui in Shanghai all recorded quick absorption of vacated space.
CBRE expects the vacancy rate in core CBDs to decrease gradually after peaking in 2021, with that in tier I cities set to fall below 10%, a level that should support steady rental growth. Occupiers seeking office space in core locations are advised to lock in deals this year while space availability is relatively high and attractive terms are still on offer.
Rents in tier II cities are likely to continue to fall amid sustained pressure from new supply. However, the rental decline will gradually lose momentum as economic growth and the business outlook improve.
Office rents in submarkets favoured by tech companies such as Optical Valley in Wuhan and High Tech in Xi’an are expected to register rental growth this year.
THE FUTURE OF WORK: RESETTING OFFICE STRATEGY
CBRE expects 2021 to see occupiers adopt a more holistic view of portfolio planning instead of the traditional approach of pursuing space expansion based on headcount increases and business growth.
Strategies for business, the workplace, the workforce and real estate portfolios will converge as occupiers crystalise a fresh new approach to creating the offices of the future.
LANDLORDS SHIFT FROM SPACE PROVIDERS TO BUSINESS PARTNERS
Office landlords are advised to take on a role as long-term business partners with their tenants to enhance asset performance through collaboration. In China, this partnership role will manifest itself across several key areas, including:
- Talent Partner: Landlords can help occupiers attract talent by providing better building facilities and services. In addition to traditional amenities such as cafés and gyms, landlords are introducing more people-oriented facilities. In 2020, China Overseas Plaza in Beijing opened PEPA Pre-school providing nursery services to the children of staff working in the building. Other innovations include launching remote clinics through 5G technology in office buildings.
- Workplace Partner: Flexible spaces are now seen as an essential component of office buildings. Occupiers in China tend to prefer turn-key units and customised space and landlords are responding by introducing these elements to their buildings.
- Business and Portfolio Planning Partner: Landlords are advised to provide greater flexibility in lease terms and rental payments according to their tenant’s business development plans. Co-operating with local governments to fund SMEs could help property owners attract budding enterprises with development potential.