Over the past few years, Beijing has emerged as one of the most expensive office rental markets in the Asia Pacific region, ranking third most expensive behind only Hong Kong and Tokyo in Savills latest Prime Benchmark report.
The CBD is the largest Grade A office precinct in Beijing with over 2.4 million sq m of stock, representing nearly 25% of the city’s total. Limited supply and strong demand over the last five years have meant that landlords have had the upper hand in many lease negotiations. However, recently, the balance of power has started to shift. As a result, rents fell from an average of RMB382 per sq m per month to RMB375 per sq m per month at the end of Q4/2017.
In contrast a number of emerging submarkets, such as Asia-Olympic and Wangjing areas, have drawn heightened interest from tenants and recorded a number of significant deals whether they be new leases, relocations or expansions. Substantial rental savings and the ability to accommodate larger tenant requirements have seen leading international and domestic firms choose to relocate their businesses to these emerging submarkets.
When compared to other business districts, the CBD is no longer the most active submarket and has actually experienced a slowdown in the number of leases signed throughout 2017.
Further, the CBD is forecast to receive a significant amount of new supply over the next five to six years, with the majority scheduled for the next four years. There are a total of 18 Grade A office projects under construction or planning in the CBD, of which 16 are located in the CBD’s Core Plot - positioned as a headquarter zone for financial and professional services companies. These new projects are estimated to add close to two million sq m of office space to the market in the coming six years, nearly doubling its current size.
While the majority of supply is expected to be completed on time, some developers in the CBD Core Plot have already postponed scheduled deliveries by at least one to two years. Consequently, the area is now expected to witness two waves of future supply. The first batch is scheduled to be completed over 2018-2019, while the second batch will be completed after 2020.
Figure 1: Future supply pipeline (CBD Core Plot), 2018 – 2023
The influx of new supply is expected to have a significant impact on the CBD market – reinvigorating the area, upgrading the overall offering, bringing in new businesses and new amenities as well as more traffic congestion.
Vacancy rates and rents in China are notoriously difficult to forecast at the best of times given policy impacts, speed of market changes as well as project completion delays...
...in the case of CBD however is also the issue of how much space will eventually be for self-use. Based on information supplied by developers, 40% of the new supply in the CBD Core Plot will be for self-use, however according to historical precedent much more of the space could come on to the leasing market with many developers typically overstating self-use requirements. Under the assumption of 40% self-use and business as normal conditions, CBD vacancy rates could rise to a high of 17% by 2019, their highest levels in over eight years, while rents could fall by as much as 12% by 2022.
This could prove to be a best case scenario, with vacancy rates rising and rents falling much more should developers choose to use less of the space themselves. No matter how much landlords choose to lease out, one thing can be assured, the CBD is set to face unprecedented new supply in the coming years. Tenants and landlords who take these factors into account and plan accordingly will be best positioned to capture opportunities or defend their respective positions, while those that are more passive in their preparation will be left playing catch up.
Figure 2: CBD Grade A office vacancy rate forecast, 2018-2022
Figure 3: CBD Grade A office rent forecast, 2018-2022