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Shanghai office market rocked by financial crisis

By Wang Ying (China Daily)
Updated: 2009-01-14 07:48

The credit crunch has posed a far more serious threat to China's business hub Shanghai than many have expected, as over one quarter of Grade A offices in Lujiazui Finance & Trade Zone were empty at the end of 2008, sources said.

"The Grade A office market in Shanghai was riding a roller coaster throughout 2008. Vacancy rate soared from below 5 percent at the beginning of the year to 15.4 percent by the end of the year," said Albert Lau, managing director with Savills Property Services, Shanghai.

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Office market readings diverged across the Huangpu River in 2008, as the average vacancy rate in Pudong reached 25.6 percent in 2008 while that in Puxi stood at 8 percent, Lau said.

Last year, 873,000 sq m of Grade A offices were released in Shanghai, the biggest annual Grade A supply in the city's history. Among the new supply, 74 percent, or 619,000 sq m came in Pudong, said a Savills report. Due to the spreading global financial crisis, only 366,000 sq m of the new supply were digested by the market.

"Shanghai World Financial Center took the lion's share of the new supply last year, but its pre-commitment was only 40 percent by the end of last quarter, meaning Shanghai's tallest office building was more than half empty," said Alan Li, national director of markets with Jones Lang LaSalle Shanghai.

A glut of office supply has forced landlords to compete for limited tenants by lowering rent constantly. A vicious circle is thus formed.

First, the overcrowded Pudong market nudges down its office rent to seek more tenants; second, tenants in Puxi are enticed eastward; third, Puxi office market cuts its rent to woo clients back; finally, the rents on both sides of the river are brought down.

Statistics from JLL show that Shanghai Grade A office rent slid 10.6 percent during the fourth quarter 2008 to 8.3 yuan per sq m.

"In the face of such a gloomy market, many developers would rather slow down project construction. Such delay will not erode much of their profit as the interest rate and employment cost are both low," Li pointed. "But still a great load of supply will enter the market in 2009 as the projects are near completion," he added.

Experts expect that new projects in 2009 will spare no audacity and generosity to get their offices rented, such as offering lower rents, longer rent-free periods, and larger commissions for agents.