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Jones Lang LaSalle: Demand in Retail and Office Sectors Continue to Rise, While New Supplies Expected to Increase in Shenyang 

No new office buildings were completed in Shenyang in 4Q11.  “In 2011, demand for office space from both domestic and foreign companies, notably financial and consulting institutions, rose significantly compared to the same time in 2010,” said Michael Wang, Managing Director at Jones Lang LaSalle Shenyang. “Demand continued to increase leading to an overall drop in vacancy rates as we saw more and more corporations choosing Shenyang as their official headquarters for north-eastern China.”

Meanwhile, Shenyang’s retail market  witnessed a supply peak in 2011, providing more than
1 million sqm of new supply over the course of the year. Thanks to international luxury and fashion brands, demand in the retail market was solid, while net absorption remained reasonable. However, pressures stemming from over-supply gradually began to manifest in the latter half of 2011 as some developers faced difficulties attracting tenants.

Macro policies, specifically restrictions on overall residential purchasing, had surprisingly little impact on high-end residential property purchases in Shenyang as demand was solid and transaction volumes remained stable.
Office – Demand from domestic companies still dominated the market, and rents remained on an upward trend

In 4Q11 no new office buildings were completed in the Shenyang office market. In 2011, three office projects were launched, namely China Resources Building in Mid Mid-Golden Corridor, Huaqiang Plaza in Sanhao, and SK Tower in Zhongshan-Taiyuan Street. Developed by China Resource, China Resource Building is the only project expected to meet international Grade A office building standards. The completion of this project serves as an indicator that the quality and management of Shenyang's office sector have upgraded to a new level, thus narrowing the gap with other Tier I cities.

The Shenyang government increased its support for tertiary industry in 2011 as more and more foreign and domestic companies set up their businesses in Shenyang, keeping demand strong for office market space. Demand from financial institutions increased significantly, especially from insurance companies. An increasing number of insurance companies began to set up large-scale call centers in the area, some larger than 4,000 sqm (Pingan Insurance and Taiping Life Insurance).

Net absorption reached 18,342 sqm in 4Q11, while the overall vacancy rate decreased by 0.9 percentage points to 16.5%. Grade A office buildings remained the major focal point in the market over the year. By the end of 4Q11, vacancy rates for the Grade A office market had dropped to 14.3%.
Driven by robust demand and the launch of high-quality office buildings, rents remained high throughout the year. Average rents reached RMB 66.1 per sqm per month in 4Q11, with a q-o-q growth rate of 3.8%.

An influx of new supply is expected to arrive next year, such as Longemont Pacific Centre and Huachen Zhongji Building, which would drive the overall vacancy rate up for a short time. However, given the strong demand, the new supply will be absorbed quickly, with existing projects expected to retain high levels of occupancy. It is anticipated that rents in the Shenyang office market will remain on an upward trend in 2012.
Retail – Retail operators speeded up their expansion in Shenyang, especially international luxury and fashion brands

A supply peak emerged in the Shenyang retail market in 2011. New prime retail projects were completed in quick succession, mainly in Mid-Golden Corridor and Zhongjie, including MOI Department Store, Joy City C & D, MixC, L'Avenue, New World Department Store Zhongjie, Longemont Shopping Centre, and Yashi Departments Store. The total new supply reached over 1 million sqm. In response to fierce competition, existing projects began to upgrade such as Shenyang Commercial Department Store in Zhongjie.  After the completion of renovation works, the project was launched on the market, with the project's Phase II also under construction.

Shenyang MixC started its operations in 2011. It is the third MixC developed by China Resource following Shenzhen MixC and Hangzhou MixC. The mall's anchor tenants include Central Department Store, Megabox, Ole, and World Ice Arena. MixC is a high-end shopping center in Mid-Golden Corridor, attracting big names like Prada, Hermes, Cartier, MiuMiu, Bally, Burberry, Ermenegildo Zegna, FENDI, among others.

Although pressure on the supply-side has already arrived due to the huge amount of new supply, demand for retail space remained robust in 2011. Encouraged by the high consumption of luxury retail goods in the city, more international brands accelerated the pace of their entry into Shenyang. The new supply, together with existing projects, had provided more options for these luxury brands. In 4Q11, Hermes opened its first store in Shenyang in MixC. During the same quarter, HUGO BOSS opened two stores in L-Avenue and MixC. Other brands such as Bally, OMEGA, BURBERRY, TOD'S, and FENDI also completed their expansion in the Shenyang market.

We expect the large influx of new supply to peak over the next 12 months with Star Mall, Xinglong Women’s Street, and Dun’an One Mall. The large quantity of new supply has already put a great deal of pressure on developers, and competition is likely to intensify. Meanwhile, the so-called "Matthew Effect" is also set to arrive on the scene. With the operations of Metro Line 2, Mid-Golden Corridor can take advantage of two metro lines, which will improve its transportation accessibility, highlighting the advantages of this new emerging commercial area.
High-end Residential – High-end residential demand stable

Restrictions on residential purchasing were launched in March of 2011, which controlled residential purchases within the Second Ring Road in Shenyang. Compared with other Tier I cities, most of the residential housing purchases in Shenyang were for self-use, and although the demand shrank, a huge decline in high-end residential transaction did not materialize unlike in other cities. For the whole of 2011, the total transaction volume was recorded at 13.74 million sqm, slightly down 1.07% y-o-y.

Rental in the high-end residential leasing market grew slowly in 4Q11, marginally increasing by 0.3% from the previous quarter to reach RMB 482 per sqm per year. The demand in the rental market was mainly from newcomers who came to Shenyang from other cities to conduct business, as many of them would rather rent than own a house.

In 4Q11, the average transaction price of high-end residential properties rose to RMB 9,799 per sqm, up 2.8 percentage points compared to the previous quarter. Influenced by macro policies and restrictions on residential purchasing, a wait-and-see attitude on Shenyang high-end residential market prevailed, and the growth rate of high-end residential market price showed a narrowed down trend. To cope with the cash flow pressure and encourage transactions, some developers accelerated the pace of the launch of new projects in the market. In 4Q11, the new supply in high-end market was recorded at 9,791 units in total.

As the tightening policies are set to continue in 2012, the wait-and-see attitude of purchasers will still grow further, thus the market is not likely to become optimistic.