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News Release

Shanghai

Decentralised Grade A Office Market Emerges in Shanghai, the first city in mainland China 

According to Jones Lang LaSalle’s research series on the Shanghai office market


The emergence of a decentralized Grade A office market is the natural next step in the evolution of Shanghai’s office market, and Shanghai is the first city in mainland China to develop a clearly defined Decentralized Grade A market, according to Jones Lang LaSalle’s latest whitepaper The Emergence of Shanghai’s Decentralised Office Market released today. This report is the third in the series on Shanghai’s office market which included Core CBD (published in 2007) and Premium Grade A (published in 2008). 

Until recently, Grade A quality supply could not be found outside the CBD.  However, over the next two years, decentralised Grade A office space will be readily available in the Shanghai market, providing tenants a new option. “These decentralised Grade A office projects offer lower cost options in a short distance from the CBD with high-quality specifications,” noted Anthony Couse, managing director of Jones Lang LaSalle Shanghai, “They represent the first generation of Grade A office outside the CBD suitable for large multinational occupiers and will become a major force in the market.”

In mid-2009, the decentralised office market comprised only 331,000 sqm of office space. This small market will grow to nearly 1.8 million sqm by end-2013 (see Figure 1), with 14 more new decentralised Grade A projects slated to enter the market by end-2010. After several years, land constraints will also begin to limit the future growth of office supply in the CBD. Beyond 2013, the CBD area will be completely built out, and most new Grade-A space will inevitably be in decentralised areas. Most decentralised projects are located between the Inner and Middle Ring Roads. Putuo district will have the largest share of the decentralised market by 2013, accounting for 26% of the total stock. Hongkou and Zhabei will account for 21% and 14% respectively. Outlying parts of Changning districts will form the rest of the decentralised market in Puxi.

Demand for decentralised space is not a new phenomenon in Shanghai. What is new is the practicality of moving into a decentralised office. In the past, a move to a decentralised location meant risking the loss of a sizable portion of staff, who wanted to remain in the CBD which was easily reached via the subway network and offered better amenities. However, better accessibility going forward will result in less employee opposition to decentralization. The expansion of the metro network ahead of the 2010 World Expo is making decentralised offices more convenient, accessible and attractive. By May 2010, the opening date of the World Expo, Shanghai will have a total of eleven metro lines in operation, allowing decentralised Grade A offices to have access to the CBD within 30 minutes or less.
 

          

Decentralised Grade A tenants will enjoy lower rental costs in addition to accessibility. On average, decentralised space is currently 31% cheaper than CBD space, and it will continue to offer a substantial discount for tenants in the years to come. Between 2010 and 2011, Jones Lang LaSalle foresees this gap to widen further to around 50% (see Figure 2). Cost-sensitive tenants will also recognise that today’s relatively low CBD rents can’t persist forever, and view decentralised office as a solid long-term strategy. The rental cycles of decentralised office and the CBD are expected to move in synchrony with a slight time lag.  A recovery in decentralised rents will likely lag a recovery in the CBD. Currently 54% of occupancy in decentralised Grade A buildings consists of former CBD tenants. To date, an estimated 110,000 sqm of take-up in decentralised buildings was driven by former CBD tenants. Of that total, 74,000 sqm was driven by former CBD Grade A tenants. “Mature markets around the world show clear consistency in terms of industry sectors among CBD Grade A tenants, which are predominantly in the financial, legal and professional services industries. Decentralised Grade A space is the most common choice for tenants in the manufacturing, technology and other industries that do not require a high-profile office location. Shanghai is now moving in this direction. Grade A buildings in Shanghai’s CBD still include tenants that would traditionally choose decentralised space in mature markets. Going forward, these tenants will be a major source of demand for space in new decentralised Grade A buildings,” added Mr. Couse.


The report concludes that the decentralised office market is here to stay. It is now ready to emerge in full force as Shanghai’s transportation network grows and connects all areas of the city conveniently and efficiently. As CBD tenants reach a key decision point for their future office location, decentralised areas will see a growing flow of tenants moving from the CBD. As part of Shanghai’s office evolution, decentralised Grade A space takes the city’s real estate market one step further forward maturity.