Beijing office leasing market speeds up its downturn

Beijing: 7 January, 2025 – “In 2024, market participants in Beijing’s commercial real estate actively responded to market challenges. In response to the sluggish leasing demand in the office market, property owners widely adopted proactive and continuous leasing strategies. Currently, the ‘price-for-volume’ approach has shown initial effectiveness in some areas,” said Rayman Zhang, Managing Director for North China, JLL. “Looking ahead, as policy stimulus measures are further enhanced, we have reason to believe that this will inject strong momentum into the sustained recovery and positive development of the economy.”

As the year of 2024 concluded, demand in the Grade A office market remained primarily driven by relocations and renewals, with landlords offering more incentives to attract and retain tenants. Despite pressures on the leasing market, Beijing’s investment market stayed active, with a total transaction volume of RMB 42.7 billion for the year, where office properties continue to be the primary transaction category. The prime retail market saw an annual supply increase of 1.62 million square meters, setting a record high. However, as leasing demand slowed, the absorption period for new projects has extended, significantly intensifying market competition. In the industrial sector, continuous rent declines have prompted some tenants in lower-tier warehouses to seize the opportunity for quality upgrades by relocating to higher-tier facilities. The upscale hotel market in Beijing remained stable in the second half of 2024, demonstrating a steady upward trend compared to the same period in 2023. The high-end residential market has shown signs of recovery under favourable new housing policies, with the price decline of second-hand homes noticeably narrowing compared to the previous quarter.
 

Overall demand contracts while demand from the financial sector returns to the top. Overall demand has contracted further, leading to a decline in total transaction volume. Transactions are primarily driven by relocation and renewal demand from existing tenants. Financial Street continued to draw demand through significant rent cuts, primarily from external regions like the CBD and Olympic Area. Leasing demand was primarily driven by financial and TMT companies. Consolidation among securities companies has boosted financial sector transactions to the top, while TMT sector demand showed a slight recovery, led by gaming companies and AI firms.

Vacancy rate challenges increase. The National Financial Information Building entered the market this quarter, adding a total GFA of 130,000 sqm. Its occupancy rate reached 40%, mostly due to take-up by the owner or related entities. Its arrival intensified competition among landlords in the already pressured Lize submarket due to soft demand. The overall Grade A vacancy rate rose 0.7 ppts q-o-q to 12.6% at end-2024, with the Third Embassy Area and East Chang’an driving up the figure as surrendering and downsizing continued to weigh on the vacancy rate.

Rents decline widens in the fourth quarter. Persistent vacancy drove rents down 6.2% q-o-q, bringing the yearly decline to 16.1%. Amid fierce competition, landlords were flexible and offered more incentives to attract and retain tenants. On December 9, the government announced that it would loosen monetary policy and support the slowing economy. “Although market confidence is expected to grow, it will require time for the new policy to generate positive momentum in the market,” said Michael Zhang, Senior Director of Office Leasing Advisory for JLL Beijing. “Occupiers will continue to seek cost-saving or quality upgrades, prompting landlords to offer appealing leases to attract clients. Consequently, Beijing’s Grade A office rents are predicted to decline further by 14.8% in 2025.”

In 2024, the property types for tracked transactions showed diversification, with office buildings remaining the primary category. Beijing recorded a total of RMB 42.7 billion in the investment transactions for the year, a slight increase compared to the previous year. In the fourth quarter, Hitone Capital successfully sold its urban renewal project “Sanyuan NEO” located in Sanyuanqiao, with Golden Eagle (Asia) Group as the buyer. Additionally, Beijing Capital Eco-Pro Group announced its intention to acquire partial building ownership of Beijing Capital Development’s “Shouchuang Xindadu” park through a cash transaction, with a transaction price of approximately RMB 700 million.

Small-scale transactions dominated the market in 2024, and there was an increasing trend in the number of foreclosure projects. In 2024, transactions valued at less than RMB 500 million accounted for one-third of the total transactions. Investment buyers continued their trend of returning to the market, with their proportion of transaction value rising to 80%. Thanks to the normalized issuance of public REITs, retail properties continued to attract widespread attention from investors. “Despite the challenges faced by the commercial real estate market in 2024, we still saw domestic investors, especially insurance institutions, making frequent investments in retail and rental apartment categories,” said Jessie Xu, Operations Director of China and Head of Capital Markets North China, JLL. “With the implementation of favorable policies for industrial and commercial land use, asset valuations are expected to receive a direct boost, which will continue to drive activity in the investment market in the future.”
 

_{Note: Prime Retail refers to the Urban market.}

Retailer performance suffers lead to weaker leasing demand. In 2H24, retailers faced revenue pressures, pausing expansion plans. With a decline in new leasing demand, landlords turned to lower-tier market tenants as supplements, resulting in a downgrade in the brand position. To maintain occupancy rates, leasing activity has gradually shifted from securing new tenants to renewing existing leases. F&B tenant volatility increased with frequent withdrawals. Meanwhile, emotional consumption categories, such as ACG-related toys and pet products, saw growth, representing 24% of the city’s new opening area.

Supply pressure rises to accumulate vacancies. In 4Q24, five new projects were introduced to the Beijing retail market, covering a total area of 628,100 sqm. Of this, 521,100 sqm of new supply was added to the suburban market. For the 2024, the total new supply reached a record 1.62 million sqm, intensifying market competition. With supply outpacing demand, the absorption period for vacant spaces has extended. The vacancy rate in urban areas rose by 0.4 ppts to 5.2%, while suburban vacancy rates increased by 1.3 ppts to 9.0%, the highest level in seven quarters.

Rents stagnate in a downward trend as demand recovery stalls. In response to weak new leasing demand, landlords have made selective rent concessions to secure both new leases and renewals. Additionally, the generally lower positioning of new tenants has pulled down the overall average rent levels. In 4Q24, urban rents fell by 0.9% q-o-q, while suburban rents declined by 1.4%. “Retailer performance pressures are expected to persist in 2025, further suppressing leasing demand. Meanwhile, tenants are anticipated to become increasingly rent-sensitive, driving further rent reductions. Beijing’s urban rents are forecast to decline by 2.5% y-o-y. Additionally, Beijing’s retail market is expected to add 1.57 million sqm of new supply in 2025. The opening rate of new projects is likely to decline further since vacancy absorption will face heightened pressure,” said Ji Ming, Research Director for JLL North China.
 

Stimulated by the continuous decline in rents, market transactions remained stable in 4Q24. As rents continued to fall, the current low-rent environment led some tenants from low standard projects in Beijing to seek opportunities to upgrade to Grade A projects in 4Q24. Several new leases of over 5,000 sqm area each were completed in 4Q24. However, the quarter saw a visible increase in the number of tenants relocating from Beijing to Langfang or Tianjin to reduce leasing costs. Most tenants remained cautious and prioritised low rents when making decisions.

On the supply side, no new supply entered the market in 4Q24. However, as several large space occupiers relocated to surrounding areas and increased demand was insufficient to backfill space, overall net absorption in Beijing turned from positive to negative in 4Q24. The overall vacancy rate increased by 0.7 ppt to 18.2%.

Landlords gave larger concessions on rents. The decline in the overall rents extended, registering -2.1% q-o-q growth and -5.5 y-o-y growth. Facing weak demand and low-price competition from surrounding areas, more landlords offered heavier rent cuts to attract tenants. The Pinggu submarket, recorded the highest downward rental adjustment in 4Q24. Faced with the pressure of large new supply in the Pinggu submarket in 1Q25, existing projects offered substantial rental discounts to get ahead of the curve and fill the vacancies.

“Rent fall to widen as market continues to tumble,” said Mi Yang, Head of Research for JLL North China. “About 1,570,000 sqm of new supply is expected to enter the market in 2025, which is about 42% of the total stock of Beijing’s current logistics market. 92% of the new supply will be located in Pinggu, making it the largest submarket in Beijing.” The rental decline of Beijing’s current logistics market in 2025 is expected to be wider than in 2024 due to the large supply pressure and cautious market sentiment. However, in a market environment of continual rent decline, a faster destocking pace of vacancies is expected in 2025.

The upscale hotel market in Beijing remained stable in the second half of 2024, demonstrating a steady upward trend compared to the same period in 2023. By November 2024, the ADR (Average daily rate) of Beijing’s upscale hotel market experienced a slight decline compared to the same period in 2023. However, occupancy rates increased, resulting in a positive RevPAR (Revenue per available room) growth. Based on JLL’s research, the F&B sector of Beijing’s upscale hotel market has been on a downward spiral since 2024, with a significant decline in the wedding banquet segment. Overall, the Beijing’s upscale hotel market holds a conservative outlook towards F&B consumption in the coming year.

The performance of the hotel market in the second-half year has also benefited from the recovery of the tourism market. Beijing ranks among the top domestic tourism destinations, especially in the inbound tourism market. Thanks to the extension of visa-free policies and increase in the number of ports of entry, inbound tourism has brought new opportunities for guest sources to the upscale hotel market. By November 2024, domestic overnight tourists reached 38.68 million, representing a YoY increase of 8.4%. Beijing received a total of 3.54 million inbound tourists, a significant YoY increase of 189%. Among these, inbound overnight visitors reached 1.67 million, a YoY increase of 86.2%. The expansion and extension of visa-free policy is anticipated to continue benefiting Beijing’s upscale hotel market. Additionally, the hosting the Sibos annual conference in October brought over 10,000 participants from more than 150 countries and regions to Beijing. This four-day conference also significantly boosted guest sources for Beijing’s hotel market.

The pipeline for upscale hotels in Beijing is expected to remain limited over the next two years, with no new openings of upscale hotels in the fourth quarter of 2024. According to JLL’s statistics, compared to other tier-one cities in China, Beijing’s figures for upscale hotels will grow at a CAGR of 0.5% over the next decade, starting from 2024. According to JLL’s research, most upscale hotels currently operating in Beijing have been operational for a decade or more. Owners prefer to optimise and revitalise their existing assets by renovating and upgrading them to maximise asset value.

Tony Liang, Senior Vice President of JLL Greater China’s Hotel and Hospitality Group, said, “Domestic tourist arrivals in Beijing are expected to peak during the Spring Festival holidays, supporting demand in the upscale hotel market. The impact of the visa-free policy is likely to continue benefiting the inbound tourism market, bringing opportunities for tourism and hotel consumption in Beijing in 2025. Looking ahead, there are significant challenges for upscale hotels in Beijing and across the country in terms of F&B and wedding banquets. Hotel operators need to plan ahead in market expansion, product and service differentiation, and seek opportunities for market breakthroughs.”
 

New policies accelerated the release of demand. A visible market recovery was seen in 4Q24. Demand growth was particularly significant in the Chaoyang and Fengtai districts. A total of 1,330 luxury apartment units were sold in 4Q24, the highest level this year and up 44.7% q-o-q. Developers offered greater discounts to boost sales towards the end of 2024. Luxury apartment prices dropped by 1.3% q-o-q in 4Q24. In the secondary market, sellers started to offer less price concessions as demand increased. Rents fell by 2.2% q-o-q. Although supply pressure eased slightly in 4Q24, leasing demand remained soft. More landlords started to offer direct rent reductions to facilitate transactions during the quarter.

Price declines are expected to narrow as demand gradually recovers. On 1 October, Beijing implemented new housing policies, including a reduction in down payment requirements and lower social security requirements for non-Beijing residents. “The new housing policies are anticipated to continue to revive market sentiment and strengthen the confidence of both developers and homebuyers. The gradual release of new demand and projects is likely to facilitate sales stabilization in 2025,” said Mi Yang. “Further price concessions are expected from developers to boost sales next year. However, driven by recovering demand and high-priced new projects, price declines in 2025 are expected to narrow compared to 2024.”